Financial Markets

Panelists discuss the global economic outlook for 2023, including the risk of recession, the state of inflation, and the geopolitical events that could affect markets in the coming year.   VELSHI: Thank you very much for this. I am always honored to be invited to preside over a CFR function because they’re all so good and so smart. But this one I jumped at because the answers to what we talk about right now are going to be the answers I actually need. I am somebody who spends a lot of time thinking about U.S. and global economics and I’m just a little confused right now about where experts like the ones you’re about to hear from think we’re going in 2023, which is going to be pivotal one way or the other. So I’m really excited about this conversation. I want to introduce and thank my panelists. Matthew Luzzetti is the chief U.S. economist at Deutsche Bank. Rebecca Patterson is a former investment strategist with Bridgewater Associates. And Satyam Panday is a chief economist at—for emerging markets at S&P Global Ratings. All three of them have a remarkable and extensive resume that you should look up, trust that they are the ones you want to talk to. We’re going to chat amongst the four of us for a little while and then sometime before the half hour I will come to you for questions, and there are various ways that you can do that, which Alexis will alert you to at the time. But you’ll be able to interact and ask the questions that we haven’t already discussed. So, with that, let’s kick it off. Thank you to all of you for being here. Matt, let me start with you, because about a year ago you put out a report—your team at Deutsche Bank put out a report in which you argued that 2022 was going to be critical for determining whether and how the U.S. returns to so-called normal inflation rates and interest rates that prevailed before the pandemic. And, you know, we were talking at the time about inflation. Some people, perhaps erroneously, described it as temporary. They used various words to describe the fact that this was not going to be something that was going to set in and affect us. We got to a midterm election in which polling indicated that this concept of inflation was going to be very, very important to voters. In the end, it was not a decisive matter for voters but it still may be. I want to ask you about how you think 2022 played out and whether or not you can take that report and just sort of install it at the front of 2023 and say, hey, it’s going to be critical this year to find out whether we get back to normal inflation rates and interest rates. LUZZETTI: Sure. First, thanks so much for having me. Really excited to be able to discuss the 2023 outlook. You know, I think you’re exactly right. If you go back to late 2021, we were looking at the year ahead as one that would be pivotal in determining whether or not we would return to what was called the new normal—you know, that environment that had set in before the pandemic—low inflation, low interest rates, not much volatility, certainly, in markets or in the economy, a Fed that was overly easy, that could focus on the labor market, had just undergone this big policy framework review focused on the labor market and average inflation targeting. I think 2022—over the past year—you know, we, certainly, learned that that transition and getting back to that period, one, it’s uncertain if that’s where we’re going back to but, two, the transition path is a very, very difficult one. And so, I think, you know, early last year, certainly, as, you know, some were thinking about the inflation shock being transitory, we very quickly learned that it was not going to be and I think the nature of the inflation shock evolved very quickly to one which was initially driven by goods. It was initially driven significantly by supply chain disruptions. It was initially very narrowly focused in terms of the price pressures that we were looking at and, you know, everybody was focused on used car prices rising 50 percent over several months. But very quickly it morphed into something that, I think, was far more concerning, one that was broader based. You know, we would look at the trimmed mean inflation gauges or the median inflation gauge, which really started to skyrocket, as one that moved just from goods to services items, which tend to be more persistent. It became more demand driven, and I think all of these things were very worrying from the Fed’s perspective, from global central banks’ perspectives. We then had the invasion of Ukraine, which overlaid on top of this a massive inflation shock in the energy market which risked an un-anchoring of inflation expectations. And I think that triggered the very aggressive policy response that we saw from the Fed over the past year, one which saw them raise rates by seventy-five basis points four times, really, the most aggressive tightening that we’ve seen since Volcker in terms of what the Fed has done. Now, I think that has put the Fed in a much better position to respond to the incoming data. I think we’re looking at risks that are now more two sided. I think for the most part of the past year we were very much worried about upside inflation risks. Now I think we are seeing some evidence in the growth data that is softening. We, ultimately, think that a recession is the most likely outcome in the second half of this year. But I think, ultimately, what we have learned and I think what is pivotal for 2023 is that getting inflation back down to target is going to be—is likely to be a very painful or at least require some pain in the labor market and economic outlook in order for that to fully happen. I guess just as a concluding remark I would note that there are structural changes that are ongoing. A lot of the global disinflationary forces that we talked about before the pandemic, many of them are probably shifting. It probably means that the inflation outlook on a structural basis is different. It probably also means that the yield curve and term structure, I think, is structurally different. But maybe those are some topics that we can get into in more detail a little bit later. VELSHI: I just want to clarify two things that you’re saying. One is while you think this will be a year in which we will experience some negative growth, your estimates are that it’s not going to be a lot for 2023 and that the increase in unemployment is also not going to be a lot. We might get back to what we used to think of as full employment, around 5 ½ (percent). Five, 5 ½ percent is what you’re thinking unemployment peaks at. LUZZETTI: Absolutely. So I want to be cautious and be humble here. VELSHI: Of course. Yeah. Yeah, I understand. LUZZETTI: So we started calling for recession in April, and for an economist to kind of call for a recession that far ahead is very unusual. I think you have a very unusual environment where, you know, you look at the Wall Street Journal survey and economists think 75 percent of recession—chance of recession over the next year. We do think that it’s going to be moderate from a historical perspective. I’d liken it most to the early 1990s recession. There’s arguments on both sides. I think the arguments are for it to be either deeper or longer or that, one, the Fed may be constrained in how much they can respond due to high inflation; two, there are, obviously, very clear fiscal risks out there with the debt ceiling, which could make this more severe. But on the other side, if you look at household balance sheets we still have significant excess savings, there’s not a lot of deleveraging that needs to take place, and the housing sector is already going through a meaningful correction. So I think that all tends to moderate the type of recession that we anticipate we’ll see. You know, ultimately, we think that leads to something that’s moderate from a historical perspective, seeing the unemployment rate rise by about 2 percentage points by early 2024. VELSHI: Thank you for that. Rebecca, you just published an op-ed in the Financial Times and the reason this is important is because we are very focused on what the Fed can do about the situation we’re in, and it’s an unusual situation in that they need to get their interest rate hikes out before we have any significant slowing of economic growth. You argue in your piece that there are a few other things at play, that regardless of the Fed’s constraints the Fed may not have an effect on or the effect of the Fed may be blunted because of external forces. PATTERSON: Or even that these external forces could affect the Fed’s thinking. So what I was talking about in this specific piece was the dollar. But I think maybe, given that we’re starting right now on the global economic outlook, let’s talk about the economics. The big one to focus on is, really, China here. So as we all have read about now and are familiar with, China has pivoted from hard lockdowns to a fast reopening and there is now a very quick change in sentiment towards Chinese growth on the back of that, and I think the question as we take this back—we can talk about China. I think there’s a lot to talk about regarding China. But as we take this back to the United States outlook and the Fed, to me, there’s two questions. One is, will the continued improvement in supply chains, thanks to China’s reopening, be a disinflationary force, especially for goods. But then contrast that—as you have a reopening people are traveling more. They’re flying more. They’re demanding more products, which means more production, more energy needs. That pushes up commodity prices. And so when you net those two things out, we think there’s still likely to be a modest inflationary impulse that comes from the Chinese reopening. So if you have this inflationary impulse that comes from China and at the same time you do have a relatively weaker dollar that’s also going to be modestly inflationary for the Fed, it could make the Fed’s job that much harder—again, at the margin, but that much harder getting down to its 2 percent inflation target. As the markets are discounted it’s going to happen in a pretty benign way by May that they—you know, the markets are saying the Fed is going to be done and start easing. To me, that seems pretty unlikely. VELSHI: Thank you for that. And I do want to actually explore the China question along with emerging markets a little bit more with Satyam. Satyam, give me a sense of how this conversation translates to the rest of the world and how the—both this—the lifting of COVID restrictions in China and, you know, some news that came out this week that has people concerned, generally, about China’s growth, how this all plays into your evaluation. PANDAY: Sure. So the couple of factors that have already been said here they do matter quite a bit for the emerging market space, in general. You know, take China, for example. That’s the first one that’s a big—you know, the pivot that we just saw in terms of the COVID strategy that does matter for the overall emerging market more than anything else, just given the weight of the trade and the financial flows that goes with it. In general, we do think where does the impetus for this growth in China come from? Is it a consumer-based growth now that’s going to be rebounding or is it industrial-based growth, right? So that does matter for the various, you know, emerging market economies. Right now, at least, from the COVID rebound we are thinking it’s more on the consumer spending side of things rather than on the infrastructure or the property sector side of things that is going to really increase this rebound in growth for China itself. That means most of the Southeast Asian industrial complex that’s more tied with the Chinese manufacturing, the consumer sector demand, that may be more, you know, looking at some gains from what we had thought earlier. You know, that also ties with the tourism sector, a lot of the pent-up demand for going out and visiting places that also is going to be seen in places like Thailand or in Indonesia, things like that. But in terms of commodity side of things, when you think of LatAms—the Latin American countries—yes, we have seen the copper prices start to move up. We also think that there will be some extra positives than what we have thought earlier for these Latin American countries. But, again, it’s not clear to me yet at this point in time how much of the policy pivot that we saw in terms of credit condition loosening for the property sector is it really going to be more than just stabilizing that sector. So it’s a little bit hard to tell at this moment. Maybe there will be more loosening in the coming months. But that does matter for the outlook. Then the one that will be considered U.S. and, I would add, eurozone as well—these two big, you know, economies for the globe—they are both sort of expected to have at least a shallow recession right now. That’s the consensus and, you know, our own U.S.—you know, our own U.S. economists, eurozone economists, think so, too. So that is going to impact a lot of these countries that are kind of tied with their industrial sectors itself. So you can think of Eastern Europe, some of the—you know, some of the—the auto-related industrial sector for South Africa with eurozone, you know, Mexico with the U.S. All of those are going to be impacted. So, all in all, below longer-run potential sort of a trend growth rate for the emerging market space after a nice bump up that COVID rebound-led tailwind that we saw last year. But, again, looks like LatAm is going to be the weakest of all with Southeast Asia, perhaps, more closer to its, actually, trend rate because it is going to enjoy more of that, quote, “China rebound” than anybody else. VELSHI: Let me just ask you quickly, because you mentioned Eastern Europe, we’re approaching on February 23 and 24 the first anniversary of the Russian invasion of Ukraine. How does that figure into your calculations? PANDAY: Yeah. They have already been hit pretty hard, you know, since then and we do expect them to have a very weak profile, you know, about a shallow recession. You know, the German industrial complex is going to sort of matter for them and it is going to impact, you know, some of the oil and the gas prices, especially natural gas, you know, depending on how that dynamics plays out for the next winter. It’s not just about this winter itself. They have sort of seen through this in a quite positive than what was expected manner. But for the next winter as well it does matter. But all in all, we do expect a much below trend growth rate for most of Eastern Europe. Again, it’s very hard to tell right now. That is something that is up in the air. Yeah. VELSHI: Rebecca, let me ask you about that as well, because part of the good fortune so far has been a milder winter than—the start to the winter season than we thought in Europe. But the bottom line is anything can happen, right. We just don’t know where this goes. We don’t know what the plans—what plans Russia has. There’s going to be a new aid package—military aid package—announced by the U.S. on Friday. We believe there’s more mobilization going on in the Russian and the Belarusian side. What’s your sense of how we think about the effect of this war, which could escalate or could end in 2023? PATTERSON: Yeah. So the war is the third big question mark for this year. If the Fed is the first—how much do they tighten, do they start easing later this year as the markets are discounting—second question being China—how big a reopening bounce do they get, how long does it last—and then the third one, of course, is the war and no one can predict when it’ll end or if it could escalate—hopefully not—before it ends. And so when you’re thinking about Europe, obviously, you have to bake that into the cone of outcomes that could happen economically and from a financial market perspective. I guess what I would say that’s interesting to me is that while Europe has done better than feared so far we’re still seeing plenty of evidence that things are slowing. Germany, obviously, the engine of growth for Europe, has seen a big turn lower in new orders for manufacturing. That tends to be a slightly leading indicator for industrial production. So that’s starting to soften further. Retail sales have been softening for the last several months now, and so things are slowing. But similar to the U.S.—not to the same degree—you have tight labor markets, you have rising wages, and, of course, the big thing is the energy shock. And the European Central Bank—the ECB—just this week from Davos Christine Lagarde reiterated that the markets have it wrong, that the ECB is going to continue tightening, possibly by fifty basis points at its next meeting, because it really is focused on its inflation credibility and getting that back down under control. So even though hopes have started reemerging around Europe, I think they might be a little bit too early and the risk that we do have at least a modest recession in Europe this year almost regardless of what happens with the wars is still what I’d be looking for, partially because of that tightening that’s not fully discounted and partly just because of the toll the sustained war takes on Europe and we’re starting to see that reflected more in the economic data. VELSHI: Matt, I want to take you back to your days at the Fed—in the Philly Fed and to your days when you were writing economics theses to tell us a little bit about the situation that the Fed is in. You made a comment in your last answer when you said the Fed may be constrained as to how much it can do because of inflation, and so this is an important consideration, right. A lot of people are critical that the Fed waited too long to start interest—raising interest rates, and may keep raising interest rates into a dramatically slowing economy or a slowing economy. But the Fed is worried about the fact that the economy turns down prior to the fact that it’s finished raising interest rates to fight inflation. Give me a little sense of how that plays out for you. We don’t want to get ourselves into a position where we’re in May and inflation is not comfortably lower than it is, even if it’s peaked, and yet we’ve got ourselves into some kind of a slowdown. Because then what does the Fed do? Does it raise interest rates or does it lower interest rates? LUZZETTI: Yeah. I think you’ve heard Fed officials, Chair Powell, many times talking about this in terms of risk management. On the one hand, they have, you know, not being hawkish enough, not tightening enough, and that doesn’t bring inflation down and we repeat, you know, perhaps, what we saw during the 1970s where, ultimately, that leads to worse economic outcomes, worse recessions, a labor market that is materially weaker; on the other hand, the risk that they, you know, do too much, perhaps triggering a recession in an environment where they need not do so. I think very early on the risk—that risk management was very clear. They were coming from a world where real interest rates were very negative and the economy was very far away from their objectives. I think what we’ve seen over the past several months is that there are some divergence in views in terms of those risk management considerations. You know, certainly, there still are upside inflation risks. We have seen inflation coming down over the past several months. At the same time, the Fed has done a lot. You know, they’ve raised rates by more than 4 percentage points over the past year and there’s lagged effects of what that’s going to have on the economy. I really do think the next several months are going to be critical but I think they’re also going to be very difficult in the sense that we’re likely to see inflation probably reaccelerate somewhat over the past several months. Some of the big items that have been deflationary the past several months like used car prices are going to be turning around. At the same time, we are just beginning to see evidence that growth is weakening. We saw it with retail sales, industrial production, the services type indicators. And so this tension in the Fed’s dual mandate it’s not there today because we still have a historically tight labor market and inflation that’s well above their objective. That tension will no doubt be there this year. We think by the end of this year you have the unemployment rate around 5 percent, inflation is around 3 percent. That is still above target inflation at a time where the labor market has eased a lot. It does present a tension for them. We think they start cutting rates in that environment, though, and, importantly, if you were to look at any of the policy rules that they would typically follow it does say that they would be cutting rates under that environment. No doubt they’re not saying that—they’re not saying that today. I think they have reasons to do so. They don’t want the financial conditions to ease. But I think if you get our forecast, the Fed will be easing monetary policy this year. VELSHI: But that’s—you know, somebody with your level of training and expertise would think that that’s logical, right. The danger is if that’s not the case, right. We get ourselves into a slowing economy, maybe one that slows more than your forecast indicates, and the Fed doesn’t. I mean, they’ve got gas in the tank now to drop rates if they needed to to goose the economy. Is there any danger that they don’t and we get ourselves into a weird spiral where the Fed’s raising rates in a slowing economy? LUZZETTI: I think there’s no doubt danger that, you know, ex-post we found out that they’ve raised rates into an economy that is going to be slowing. That is, I think, the natural risk that you take and that was inevitable with, you know, being somewhat behind the curve because we were all surprised by this inflation shock, and having to move so aggressively. I think they can help minimize that risk by getting down to twenty-five basis point rate increases in February. I think that’s the very likely outcome. They will be able to assess the lagged effects a bit better. But, you know, I think that risk will still be there. VELSHI: Satyam, generally speaking, central banks around the world followed the roadmap put out by the Fed. Lots of countries were late to raising interest rates. Lots of countries got aggressive. Lots of countries sort of look at what the Fed does and does the same thing. Is it your sense that everybody’s moving correctly at the right velocity despite the fact that they may have gotten a late start to raising rates? PANDAY: So, Ali, just to rewind back a bit here, there were some—you know, countries like Brazil, Chile, that actually were ahead of the curve this time. When they saw inflation expectations start to move they immediately were moving. So they actually moved a year earlier than the Fed did. So that’s one thing. And the second thing, there are countries like Mexico and others which are very much closely tied they’ve got an eye on the Fed. Exactly whatever the Fed does they are looking at it and they have been moving together in tandem even though their growth may have slowed down and that’s because they do want to protect their capital. They don’t want to see capital outflow and they do want to protect some of that exchange rate valuations as well, and we have seen that throughout this year. In fact, the emerging market as a whole had a lower depreciation against the U.S. dollar than the advanced economies if you were to consider that. Some of it has to do with the terms of trade as well. But, still, this time around emerging markets, central banks, were on top of their game. Yeah. VELSHI: Do these standout emerging markets worry you, the ones that have inflation that is many times the rates that we’re talking about in the developed world? PANDAY: Well, there are a few but, again, it has to do with the commodity prices. It has to do with the oil price. You know, Eastern European countries like Hungary, Poland that comes to mind. Some of the countries have more of a core. Like, South Africa is going through this supply-based electricity, you know, issues and things. That has— VELSHI: And they’ve got rolling outages two times a day. PANDAY: The rolling outage is very bad. It’s sort of they were not able to capture some of the terms of trade that comes with the high coal prices because of that but—and then in the LatAms you’ve seen some of those inflation already peak and start to come back down. But, again, yes, there are some countries—there are always some countries in the EM space that are a little bit above in general terms. Yeah. VELSHI: In a few moments I’m going to go to questions. Rebecca, I want to ask you about the situation going on in the United States right now. Today, Janet Yellen said that the country has reached its 31-point-something-trillion-dollar debt limit and she described some of the things she’s doing to try and stretch things out until June and she says in June she’s going to run out of headroom and the United States will miss some payment on something. There is a Republican plan that the Washington Post has said is being floated about whom to pay and whom not to pay, except credit experts understand that if you miss any payment it’s the same as missing all payments, right. Missing your car payment is not better than missing your mortgage payment. Talk to me about the effect of this micro situation and sort of political polarization and dysfunction in the United States as a threat—how you evaluate it. PATTERSON: Sure. So yes, it is a potential policy mistake that could be—even if it’s known well in advance could be very material both for financial markets and the economy. But before I address that just real quick—when we’re talking about policy mistakes one thing we haven’t mentioned yet but I just want to make sure we touch on at least briefly is not only is the Federal Reserve raising interest rates but it is also reducing its balance sheet. VELSHI: Right. PATTERSON: So quantitative tightening, which is happening at double the pace that it did when it tried this in 2018. And the Fed itself admits it doesn’t have a large sample size to understand how this is going to play out and so, again, when we’re talking about how far should the Fed go, how fast should the Fed go, when should it ease, et cetera, there’s a lot less certainty this time around not only because of the economic conditions but also because they’re using a policy tool that they just don’t have as much experience in. VELSHI: Right. PATTERSON: But going back to your question on the debt ceiling, so I think we have, as you put it, the tactical—(audio break)—the dynamic that it’s reflecting. On the tactical micro issue, if you can go back to 2011, the last time we flirted with a default the S&P rating agencies downgraded the U.S. sovereign credit rating to AA and we saw the U.S. stock market fall nearly 20 percent in just a few months. We saw the ten-year Treasury yield fall almost by half, from 3 percent to 1.7 (percent). We saw an 18 percent rally in gold prices. Now, what I worry about this time around—now, at that time, Europe was also a mess. They were going through their debt crisis. That might have contributed. This time around we’ll see where Europe and China are. But what we do know is the Fed is probably going to be looking at a world with inflation still above target so it might be harder for them to ride to the rescue if we do have this shock. And I do think the risk is probably the highest it’s been at least since 2011 that this does materialize even if it’s for a very, very brief period. And then, finally, going from the tactical issue to the broader dynamic, I have spent a lot of time trying to understand the linkages between politics and policy with economics and financial markets, and there isn’t a ton of great data to analyze. But what I have been able to find suggests that when you do have less functional governance, and I think we could argue that’s what we’re looking at here today, it can affect the economy and markets simply because if you don’t know what regulations are going to be, tax rates are going to be, fiscal monetary policy is going to be—not the monetary in the U.S.—but then it’s harder for businesses to plan and if they’re having a harder time planning they’re probably going to be more cautious and that means less investment, less hiring. So that’s going to slow growth. It’s going to weigh on earnings expectations, which in turn can feed into stock prices, and we’ve actually seen evidence of that across countries across time. It doesn’t always work that way. If you had extreme fiscal easing or monetary easing that could dominate that political effect. But at the margin, the functionality, if you will, of governance absolutely matters and the degree we’re seeing what’s happening in the U.S., all else equal—again, fiscal policy aside—I think, is a tax on growth and a tax on markets in the United States. VELSHI: Yeah. It’s an interesting point because I’ve been focusing on my show on this less functional governance issue and what the question I get on social media from a lot of people is how is this going to affect my 401(k). And, by the way, they really are interested in that. They want to know that. It’s been a rough year in markets and they want to know how that nonsense going on in Washington affects them. You are all fantastic. My head’s exploding with all the various threads we can go down. But, unfortunately, I don’t get to ask all the questions here. Fortunately, for the audience, they get to ask questions. So I want to hand it over to Alexis to start us off with some of the questions that we’ve already got lined up. OPERATOR: (Gives queuing instructions.) We will take our first question as a written question from Michael Godley, who asks: Are there any expectations for additional rate hikes coming from the Bank of Japan? If the Bank of Japan raises rates what impact would that have on your global economic forecasts? VELSHI: Very, very good question, given that there’s been a lot of activity—economic activity in Japan, a lot of concern that Japan does not want to get itself into a pickle around interest rates and inflation. Matt, is that for you or Satyam or both of you? LUZZETTI: I can give a brief comment there. I mean, certainly, from a global market perspective the Bank of—recent Bank of Japan meeting was a key focus. And I think it’s a key focus for the global yield curve because if there’s one area that, I think, can lead to a big rise in the term premium and a big steepening of the curve, people are focused on the Bank of Japan relenting from their yield curve control targets. Obviously, they didn’t do that this week. Our expectation is that they will move that band at least higher, perhaps abandon it later this year. That should be a—something that does lead to higher interest rates. And then, ultimately, whether or not you get further tightening, I think, is a big question for are we seeing core inflation in Japan continuing to move higher; are we seeing the labor market producing wage growth that suggests that inflation is going to become a more persistent story there. So I think, yes, there will be movements into that direction. But the Bank of Japan has showed a pretty substantial and meaningful commitment to yield curve control in the current environment even when it was anticipated they were going to back off from that. VELSHI: Why is that different than the U.S.? The Japanese are concerned that inflation is higher than wage growth. Inflation is higher than wage growth in most countries right now, certainly, in the United States. LUZZETTI: Yeah. No, I think the inflation data that you have there is simply very different than what we’ve had in the U.S. We had this massive inflation shock where core inflation, broader measures, trimmed mean, median, were very elevated and moved—and are coming lower but at levels that are still, you know, double or more the Fed’s objective. We’re just beginning to kind of see core inflation move higher in Japan. At the same time, you had the coincidence of the labor market in the U.S. historically tight, 4 ½ million more job openings than unemployed individuals, unemployment rate at, you know, fifty-plus year lows with wage growth inconsistent with the Fed’s 2 percent objective. We just haven’t had that sustained type imbalances in the Japanese economy as of yet, which, I think, has allowed the Bank of Japan to hang on to their policies a bit longer. PATTERSON: And if I can jump in just very briefly on this. I think it’s important to put the historical perspective on Japan’s thinking today. You know, Japan has been trying to exit zero inflation, or deflation, for over a decade and now it’s finally gotten positive inflation rates and some wage growth, which, I think, they’re actually very happy about. And what has happened in Japan for, again, the last decade is every time the economy started to reflate—better growth, better inflation—they would start doing fiscal tightening or premature tightening of some sort and push them back to the beginning. So it just—they kept having these false dawns, and I think part of the reason they’ve been reluctant to leave their yield curve control policy—their easing monetary policy—in contrast to the rest of the developed world is because they don’t want to have another false dawn. They want to make sure that this positive inflation environment can stick and so they want to be very, very careful how they get out of it. VELSHI: Yeah. There’s sort of an historical memory in Japan that is making them more cautious, something we sometimes forget about here. Thank you for that. Alexis? OPERATOR: We will take our next question as a written question: Alongside conversations about how to lower inflation there have also been some debates about the target number itself. Is 2 percent the right number or should we also reconsider our target? VELSHI: Who’d like that? PATTERSON: I’m happy to start. I’ve been involved with the New York Fed for a lot of my career on different committees and working with them on different projects. It’s, certainly, something I follow carefully. I think right now the Fed’s primary worry is credibility. If they were to stop tightening or start easing interest rates with inflation—you know, core PCE much above target—I think they’re worried about credibility. I think that also goes with—let’s say they say, well, we could raise the target from 2 (percent) to 3 (percent) or we get to 3 (percent) and we just say that’s good enough. The problem is then the next time we have higher inflation do they settle for 4 (percent), do they settle for something else. And so the Fed, I think, is extremely focused on making sure inflation and inflation expectations stay anchored because that price stability is supportive for the broader economy. So, in the short term, I think that is critical. That said, there have been talks even before the pandemic about what the right target number is and most Fed officials will admit that 2 percent isn’t necessarily scientific. It was not too hot, not too cold. So in the next coming years could we see another policy review that leads to a slightly different inflation target? I think it’s absolutely possible. I just don’t think it’s likely to happen in the current environment, given that credibility worry. VELSHI: Interesting. I’m reading between the lines here, Rebecca. If you have these types of policy conversations and recalibrations in normal times they’re just reasonable discussions that doesn’t affect your credibility. If you have them today it feels like you might be copping out. PATTERSON: Correct. Absolutely. VELSHI: Satyam, how does this work in the rest of the world? Do people come up with the higher expectations or do they think the U.S. 2 percent target is a little silly? PANDAY: Well, not really. I think—I do agree with Rebecca on the credibility issue. They should probably—they do know that they would want to keep that as is. There is something called the time consistency effect. You want to make sure your credibility is intact. You don’t want to be flip flopping here. But something very similar that came out just the other day—I think it’s from Brazil—that Lula was overheard saying that maybe, perhaps, the central bank should not be as independent and maybe they should be just increasing their inflation target rate in Brazil from 3.25 (percent) that they have right now to maybe, perhaps, to 4.5 (percent) and that sort of—immediately your ten-year bond yields, the risk premium that you, you know, put on that immediately jumped up. And so you have to be very careful as a politician, especially, and that, you know, stature to say things that don’t really spook the market, don’t really get the credibility of your own central bank in, you know, jeopardy. So I think— VELSHI: That’s a good point. PANDAY: —that would be something to learn. And it’s probably not like that for the U.S. but at least for the rest of the EMs they have to be very careful. Yeah. PATTERSON: Well, and the U.K. almost became an EM late last year, you know, and a year ago you were seeing policymakers in the United Kingdom talking about the Bank of England’s independence. And after we saw Liz Truss and her cabinet suggest some very, very extraordinary fiscal stimulus with inflation at double digit rates and the market reaction forced the Bank of England to jump in and, frankly, save the day, I think that talk’s gone away very quickly. But I think it’s a great point everyone’s making here about central bank independence. If inflation stays stickier for longer when the unemployment rate starts going up, as this starts to be felt more painfully among the electorate policymakers could decide to try to point fingers toward central banks. So I do think that’s something we should watch out for over the course of this year around the world emerging markets and developed. VELSHI: Matt, your take on the inflation target and its reasonableness and this question of credibility? LUZZETTI: Sure. I think maybe there’s just two ways to think about it. One is a nice theoretical argument about whether or not 2 percent is the right target or not. I think, you know, Fed officials and most—maybe many central bankers might tell you that no, you know, if you were to run simulations with the Fed’s model about how often we’re going to hit the zero lower bound and how often that’s going to be binding with a 2 percent inflation target. It’s just much more of an issue than they thought it was going to be at the time when they set that 2 percent objective. So there’s a theoretical argument for a higher inflation target. That said, what everybody said makes complete sense. There is no way the Fed change their inflation target, moves the goalposts when they’re missing it from the upside. There’s no better way to ensure that they’re not able to get inflation expectations while anchored than to move the goalposts at a time where they’re not meeting their objective. I would only maybe just conclude with Chair Powell had a really interesting comment in the December FOMC meeting when he was asked about that. He said, basically, you know, today we’re not thinking about it at all but it may be a longer-term project, which I was surprised that he at least admitted to considering that over the longer term, given where we are today, from an inflation perspective. VELSHI: Where do you think we’re going to—when do you think we’re going to get to 2 percent or a place that the Fed can reasonably have that conversation without it affecting credibility? In other words, close to 2 percent. LUZZETTI: So we have inflation in 2024 getting down to 2 ¼ percent. VELSHI: Got it. OK. LUZZETTI: And, you know, it takes a recession to get there. I think there’s these structural inflation drivers, which mean that we’re going to be above 2 percent rather than below. They have a policy framework review out in 2024-2025, which will be the next time where they’re rethinking their framework. You know, I don’t think that’ll be a key area of discussion but it could be one if we’re in a world where inflation is below their target. VELSHI: But it would be the beginning of the time when you can think about that being a discussion. LUZZETTI: Yeah. VELSHI: Mostly I’m trying to just underscore your point, that your scenarios about growth and inflation and unemployment over the next couple of years nobody likes any kind of recession. But you’re not thinking about a severe one right now. You’re thinking about one in which most things bottom out in 2023 and start to improve economically by the end of the year. LUZZETTI: That’s right. That’s our central scenario. VELSHI: Got it. Thank you. Thank you. A very robust set of answers from everyone. I appreciate that. Alexis? OPERATOR: We will take our next question as a written question from Andy Stull, who asks: What is the significance of the interest expense on the national debt approaching the amount of fiscal tax receipts in terms of limiting monetary and fiscal tools to manage the economy? VELSHI: Excellent question. Rebecca, you want to start with that? PATTERSON: Sure. Happy to. This, to me, is something we’re going to see in the U.S. but also globally. As interest rates reset higher and interest expense on debt is higher and a bigger part of the pie, governments are going to be faced with tradeoffs, and we can’t forget how much our debt levels have changed. We saw a big ramp up from the financial crisis in 2008-2009. We saw another ramp up with the pandemic and then the responses after the pandemic. And so we’re looking at extremely high debt levels, again, across a lot of the developed world. It’s interesting right now. You’re seeing a hint of what could come in France. So Macron is trying to change the retirement age in France by two years—sixty-two to sixty-four—and we have riots and protests on the streets, and the reason he’s doing it is because the government simply can’t afford to spend that amount of revenue on retirement and social spending programs. We’re going to see the same thing when it comes to Japan, when it comes to China, when it comes to the U.S., across Europe, South Korea. As economies age and you have a higher dependency ratio, you have more retirees and you have less revenue coming from the labor market, you’re either going to have to have higher taxes, which is never very popular if you’re a politician. You don’t want to have to pass that. Or you’re going to have to have cutbacks in spending somewhere. And so, yes, you want to have reflation in an economy. You want to have growth. But you need that growth to be higher—the pace of growth to be higher than the pace of the interest rate increases or that interest rate expense is going to nibble away at everything else and cause some very hard tradeoffs for politicians, which, in the case of France right now, is leading to social unrest. VELSHI: Yeah. Satyam, let me just ask you about this because this particular question becomes relevant, obviously, with the debt levels that we’ve got here in the United States. It’s been a very relevant question for emerging markets for a very long time. There are lots of countries that you cover where debt limits are crippling to the economy and changes in interest rates like this are really something that is existential for some of them. PANDAY: Yeah, and especially, you know, after the COVID, all of those stimulus and the tax exemptions that were given in order to make sure that the households’ balance sheets were not completely, you know, shattered and the businesses as well, I think some of the core EM countries they do have their debt as a share of GDP gone up quite a bit than what we have seen in the past cycles. There have been some countries where, you know, like Sri Lanka, you know, Pakistan, and, you know, Tunisia, these have already started to kind of sort of, you know, come in a new cycle. But they are quite small in a broader scheme of things that don’t really have that systemic issue here. But this time around, at least in the EM space, a lot of the debt that were taken out were in their own local currency rather than in, you know, U.S. dollar. So that sort of gives them a little bit more cushion in terms of how this is going to play out. But, again, I think the private sector side of things more than the sovereign side of things have been getting more and more debt burdened and this is something that is going to be playing out when—especially right now when the interest rates have moved up quite a bit. So the debt burdens and the debt ratios as a percentage of their income is going to be pressured in the next twelve to eighteen months. So that’s something to look out for. VELSHI: And Satyam has brought up matters relating to the dollar, which takes us back, Rebecca, to the op-ed you wrote and the topic of it. Let’s just talk about that dollar weakness and its implications. PATTERSON: Yeah. Well, last year—2021 and—part of ’21 and most of 2022 we saw a very rapid, fairly broad-based dollar rise, again, more against some of the developed markets than most of the emerging markets, although Turkey, Argentina—there were a few outliers—and that’s kind of turned about face. You know, since September/October we’ve seen a pretty rapid dollar decline. Now, part of that is changing expectations for the Federal Reserve. Now the terminal rate—so where the rate finishes, the hiking cycle—is under 4.9 percent. Just a few weeks ago, it was above 5 percent. And I think Fed officials are at pains to say, hey, we may not finish till we’re above 5 percent. So the changes in Fed expectations could continue to create some dollar volatility. But as we mentioned at the beginning of our conversation today, forces externally matter as well. You know, the dollar is extremely expensive by historical standards and currencies, over time, tend to mean revert. The other force that tends to drive currencies structurally is their funding needs. So the U.S. tends to run a current account deficit. It’s around 3 percent or so of GDP right now. So that means it needs to attract capital to support the dollar, and what we’re seeing today and since late last year is the opposite. As expectations towards Chinese growth have improved with the spillover that has to other emerging markets, especially in Southeast Asia, as you’ve seen Europe have a better than feared winter, you’re starting to see money go from the U.S. out to some of these other markets looking for better valuations and an opportunity to position for that improvement in growth. And so I think it’s really been not just the changes around the Fed but also changes around expectations in investment opportunities overseas that have led to this dollar weakness. And so when I look ahead, say, OK, will we continue to have a weaker dollar or could this flip flop again, could we see another bout of dollar strength volatility, I would be pretty careful. We don’t know how strong the China reopening will be. We don’t know if it’ll be a straight line, given the number of cases that could erupt even right now as we go into their lunar new year. We don’t know what’s going to happen with the war in Ukraine and how that flows through to Europe. And so I think investors just need to be pretty humble about these trends and whether they can be persistent and strong over the coming months. This is an environment with so much uncertainty, whether we’re talking about wage inflation in the U.S., COVID in China, the war in Ukraine, that you really want to make sure you keep your financial market positioning, so to speak, and your economic views humbled. VELSHI: Yeah. Smart idea. Thank you for that. Back to you, Alexis. OPERATOR: We will take our next question as a written question: Do the recent tech layoffs impact your outlook for the broader labor market in 2023 or do you see those changes as mostly confined to that sector? VELSHI: Rebecca, let me start with you on that as well. PATTERSON: Sure. I mean, we have seen massive layoff announcements from the tech sector. But, so far, the layoff announcements we’re seeing are fairly confined to parts of the economy that saw massive hiring into and during the pandemic. It doesn’t reflect a more broad-based trend yet. Key word there is “yet.” When I’m trying to understand where the U.S. economy is going I’m really looking at this interplay between the U.S. consumer and wage inflation. The U.S. consumer, as Matt pointed out earlier in our conversation today, was a huge beneficiary from the pandemic economically. The fiscal and monetary easing left them much wealthier into the pandemic than they were beforehand. So they had all this money they could spend, that demand shock adding to inflation. So, today, they have worked down that excess savings but they’re continuing to spend at a decently robust pace, primarily tapping into their credit cards. So one of the key indicators I’m watching is how long can the consumer hold up. Consumer confidence is starting to come down. Retail sales is starting to come down. I want to see that reflected in credit card usage, and when we get earnings from the banks, as we did last week, and we hear from the banking executives at Davos this week, it’s suggesting that, so far, U.S. consumers are still spending. Now, that’s important because if they’re still spending it means that companies are producing and they need to hire the workers to produce, which means the labor market stays strong and wage inflation stays elevated. Wage inflation, based on the Atlanta Fed today, is still over 6 percent and the service sector, which is very labor dependent, is by far the biggest sector of the economy. And so understanding the interplay of the consumer and wages, to me, is going to help us understand what the Fed needs to do to get inflation to target later this year and how big of a recession we might see. Right now, it’s early. The consumer is slowing but they’re not that weak yet. They’re still tapping into their credit. VELSHI: Matt, you’ve made an interesting point. Just tacking on to this question of tech sector unemployment, you’re talking about the unemployment rate exceeding 4 percent by midyear 2023, reaching about 5 ¼ (percent) by the year, the end—by the end of the year, peaking at about 5.5 (percent) in 2024. We referenced this earlier that, you know, for some of us 5 percent we always thought of as full employment. So that’s not critical. But you mention that the chronic under supply of workers may lead some companies to hoard. In other words, if they don’t need them—despite the fact that they don’t necessarily need anyone, either the acquisition cost or the difficulty in rehiring replacement workers might look too hard for the next couple years so let’s just keep them on the books. LUZZETTI: Yeah. I think you’ve seen some evidence of that over the past year. You know, we had a technical recession in the first half of last year but we’ve had a labor market that has remained incredibly tight. Job gains have been very strong. We got jobless claims data this morning—less than two hundred thousand on initial claims. So very, very low, suggestive that although there are high-profile tech layoffs, the broader labor market remains strong at the moment. I do think, you know, there’s—when you look across sectors what the most important explanatory factor for employment growth is it’s how far above or below the pre-COVID trend that sector is. Those sectors that overhired or saw this big boom in hiring are now slowing more materially, perhaps, lifting layoffs, reducing hires. Those sectors that are undersupplied or underemployed are health care and education. Leisure and hospitality are still hiring pretty robustly. It does set up this big question over the next year. It’s been this big macro debate between the Fed and Governor Waller and Larry Summers and Olivier Blanchard about, you know, how does this labor market come back into better balance; can we just have job openings come down without layoffs picking up. One, we haven’t seen that ever happen historically. But, two, I think when you look across sectors today we’re seeing those sectors that are reducing job openings are reducing their hiring pretty materially. So, to me, that tells me if new job openings come down by 3 million over the next year to bring the labor market into better balance, it’s very likely we’re going to see the unemployment rate rise. The extent of that rise may be constrained by the fact that firms want to hoard some labor because they’re concerned that if this is a shallow recession on the other side they won’t be able to re-find those workers. VELSHI: Right. Thank you for that. Alexis, over to you. OPERATOR: We will take our next question from Andy Stull, who asks: Notwithstanding the privacy and control concerns or congressional approval requirements, are there other tools in the future like implementation of central bank digital currencies that offer new options to manage economic cycles? VELSHI: Thank you for that. Matt, let me start with you on that. LUZZETTI: Sure. So, I guess, you know, certainly, from the Fed’s perspective in terms of managing economic cycles, the unconventional tools that they’ve had have become conventional tools. So, obviously, the policy rate remains their primary tool, will continue to do so. They have tools like QE, which have become conventional. Certainly, forward guidance has become a conventional tool. The Fed really expanded their boundaries of what they could do during the pandemic by opening up many of these credit facilities, which extended credit under exigent circumstances to a broad swath of the economy. You know, I think reopening those requires unprecedented events like we saw during the pandemic. I think the Fed would not like to make that the norm, going forward. And so I do think we’re in a world where, you know, the Fed’s tools are reasonably well defined at the moment. It’s the policy rate, first and foremost. If and when that gets down to the zero lower bound it’s restarting QE, and that being mostly through MBS and Treasury security purchases, and in environments where you’re seeing credit markets seizing across the board, you know, perhaps, going to the Treasury in order to get approval for these credit facilities again. But certainly I think the Fed hopes that we don’t get back into an environment where that becomes part of the new normal of their toolbox. VELSHI: And do you have a view on digital currency in the Fed? LUZZETTI: Not a strong view. I mean, the Fed, I think, has—within different officials there’s mixed views within the board at the moment. I think that they’re, you know, looking to see how this plays out in other arenas. I don’t think that they’re likely to be at the forefront of this. It’d be a little bit more of a reactionary. But not a strong view at the moment about how or when it’s going to play out. VELSHI: Rebecca, I’d love to hear your thoughts. Yeah. PATTERSON: Sure. Yeah. I have been trying to follow—I started my life in currency markets so I’ve been trying to follow crypto currencies as well. You know, the country that we’re seeing at the forefront is China of the major economies and they have been using a digital currency as a policy tool in very, very limited ways but they have been. Over the last year, year and a half, they’ve actually done what some people refer to as helicopter money but using a central bank digital currency. So they can target the exact people. They can target what they want them to spend on and for what period of time and say, we’re going to give you a digital red envelope and you can spend it on this, that, or the other over this period. So you can get extremely targeted fiscal stimulus to different parts of the economy, which I think is fascinating. So far, that sort of tool, again, has been very limited. I’m sort of surprised they haven’t used it more in the last year as the consumer has been so beaten down. In the case of the U.S., though, I do think we have no interest on being on the forefront of a digital currency. I think using more digital payments is something the U.S. is very, very keen on. But actually having a digital dollar there are so many implications, given the importance and size of our banking system, that the Fed and the U.S., I think, generally, are going to tread very carefully. I think of the major economies we’re more likely to see progress earlier from Europe. The European Central Bank has suggested they will have a digital euro within the next few years. The U.K. is also talking about that, and all of these countries are looking to those smaller, if you will, experiments happening across the emerging world to learn lessons to try to avoid mistakes as they move ahead with this. VELSHI: Satyam, I have no credibility on this conversation. In order to get some, I bought a thousand dollars’ worth of bitcoin at one point. I just checked my balance—I don’t know if you can see that—$371. So I’m going to recuse myself. But if you have a view on digital currencies and the role they’re playing, certainly, in emerging markets, as Rebecca was just referencing? PANDAY: You know, the only thing that I want to add in terms of emerging markets, you know, again, there are—they have been used as payment systems where, you know, cost of transmitting monies through the banking system is much higher over in the emerging market space. So some kind of a, you know, problem has been solved over there. But in the U.S. I’m not so sure what problem exactly it’s, you know, solving in terms of giving some, you know— VELSHI: Well, if you happen to be in Williamsburg at a bar and you don’t have cash on you it solves that problem. (Laughter.) But yeah. No, I get your point. For Nigeria and for Iran and for Russia and places like that where you needed a Dell computer and you couldn’t buy one with your credit card it solved some problems. PANDAY: Right. VELSHI: But I get your point. Alexis, do we have time for one more? OPERATOR: Of course. We will take our next question as a written question: To Satyam, could you elaborate on which emerging market economies seem to be at greatest risk in 2023? Do these nations have any common vulnerabilities? PANDAY: So, you know, I would look at some nations with, you know, twin deficit vulnerabilities in terms of your current account, you know, deficits and fiscal account deficit together. You know, Colombia sort of comes to mind right now when you sort of do a scatterplot and see where exactly these fall. You know, Colombia, Chile, they have recently been in your northwest, where both the debt and the current account, you know, deficits had been rising. In terms of Chile, though, however—you know, China does matter, maybe, and the fact that they’re going through a recession right now actually may actually get their current account deficits to move back down. Some other countries that you can think of they’re not really in your core emerging markets, per se, but they are kind of sort of on the sidelines. I think Tunisia is one place. Egypt has been in the news quite a bit. A lot of it has to do with, you know, your international commodity import prices being very high. You know, food prices have come in play for Egypt and some of the North African countries. If those were to stay, if it sustains this environment with Ukraine and Russia, you know, transferring into higher commodity prices and oil prices, I think they will be pressured to do more of, you know, consideration of how to adjust their balance sheets. So, but besides that, I wouldn’t quite point out one single country yet at this moment. You know, there are Turkeys and Argentinas. They are sort of, you know, always there that we can talk about. But, again, at this moment, there’s no other one that just sort of pops out in my head. VELSHI: Thank you for that and thank you to my colleagues here who helped us through this. This is remarkable. You know, most of my interviews on TV are five minutes long so we can never get to these things and never get to the extra question or follow a line. And I’m so deeply appreciative. We’ve taken a world tour here and I am, certainly, smarter for it. So I’m grateful to all three of you. To Matt and to Satyam and to Rebecca, thank you. Thank you to you, members of the Council on Foreign Relations, for your remarkable questions, and thanks to CFR for hosting this. Please enjoy your day. (END)

Panelists discuss the cost of China’s zero-COVID policy, the country’s dwindling economic growth, and the consequences of China’s economic slowdown at home and on its international economic relations.

Martin Wolf discusses the global economy, the repercussions of the Russian invasion of Ukraine, and economic recovery from the COVID-19 pandemic. The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

Lawrence H. Summers discusses the U.S. economy and inflation, recovery from the COVID-19 pandemic, and the global economic consequences of Russia's invasion of Ukraine. The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

Roger W. Ferguson Jr., Steven A. Tananbaum distinguished fellow for international economics at CFR, leads a conversation on the future of capitalism.  FASKIANOS: Welcome to today’s Winter/Spring 2022 CFR Academic Webinar Series. I’m Irina Faskianos, vice president of the National Program and Outreach at CFR. Today’s discussion is on the record, and the video and transcript will be available on our website, CFR.org/academic. As always, CFR takes no institutional positions on matters of policy. We’re delighted to have Roger Ferguson Jr. with us to talk about the future of capitalism. Roger Ferguson is CFR’s Steven A. Tananbaum distinguished fellow for international economics. Previously, he served as president and CEO of TIAA, and before that he was head of financial services for Swiss Re and chairman of Swiss Re America Holding Corporation. He is the former vice chairman of the board of governors of the U.S. Federal Reserve System, and he currently serves on the board of several corporations and organizations, as a fellow of the American Academy of Arts and Sciences, and is an advisor with various private fintech companies. So, Dr. Ferguson, thank you very much for being with us today to talk about the future of capitalism, and it is kind of astonishing that we are talking about the future of capitalism. Can you talk about this area and what you see the strengths are and weaknesses as well? FERGUSON: So thank you very much, and I’m going to actually start with a quote. I think this is a quote from 1938 that roughly captures why we are talking about the future of capitalism. So this was from FDR, a famous U.S. president. In 1938, he said, “Democracy has disappeared in several other great nations, not because the people of those nations disliked democracy”—or you might say capitalism—“but because they had grown tired of unemployment and insecurity, of seeing their children hungry while they sat helpless in the face of government confusion and government weakness through lack of leadership in government.” Now, that is a strong statement. It is not exactly where we are today. But there are a few points here that are relevant and resonant with where we are today. So the reason that we’re looking at and talking about this question of the future of capitalism is that there are many surveys that suggest that young people, in particular, are not sure that capitalism is the system that they want to use to organize their economic life. We know that capitalism has been very successful in many ways. It has brought, literally, hundreds of millions, if not billions, of people around the world out of abject poverty. It has created some of the most iconic and successful companies that the world has ever known. We’ve seen dramatic transformations in our lives in terms of our ability to do everyday tasks using smart phones, and they’ve only been around twenty years or so. All these things are the outcome of a capitalist system that is very robust, that has created new entities, that has allowed other things to grow—business, et cetera. Having said that, for many people, capitalism is still a bit of an enigma. They look around and they observe, at least here in the United States, that income has been gradually rising and inequality, starting, roughly, in the mid-1970s. They’ve seen very unexpected crises here in the U.S. and in other countries emanating from mysterious and misunderstood financial tools such as subprime mortgages. They see longer-term challenges for many people around health inequities, which became very clear during the COVID-19 crisis that is still with us in some ways. And, obviously, there are for many people, the ongoing challenge of climate change with very extreme weather, and we’ve experienced that as well. And so while capitalism is, I think, really recognized as the organizing force that has brought many people out of poverty, allowed new tools, new capabilities, a very comfortable lifestyle for many, it’s also seen as, perhaps, not doing everything it’s supposed to if you have increasing income inequality, increasing wealth inequality, and you look and see health inequalities and different outcomes, that they guess maybe the system should be somewhat better. The second point I’d make is, for me, it’s really quite ironic because I grew up at a time when there was conflict between capitalism and communism, and then in late 1980s, early 1990s, communism disappeared. The Soviet Union fell apart. And since that time, capitalism is the way that almost all societies have organized themselves. In the United States, we have capitalism that is regulated market capitalism, and Europe tends to be the kind of capitalism that leans a bit more towards social democratic norms. In Japan, there’s a kind of collective capitalism. Even China, sometimes called communist China—when I was growing up called Red China—under Deng Xiaoping. He had this famous phrase, “It doesn’t matter if the cat is black or white as long as it catches a mouse,” and people took that to be a dramatic move towards a capitalist kind of system, even in communist China. And so capitalism, for a period of time, was and still is the dominant way of organizing all—almost all of the major economies of the world. There are a few outliers. But the major economies have different versions of capitalism. There are five or six versions of capitalism. And now, suddenly, here we are in 2020, 2021, 2022, and we had an election in the United States when some of the candidates were talking about socialism. We see in China a reversion back to some skepticism about the kind of capitalism they had and the great wealth inequality that resulted. We see other surveys that suggest people around the world are less enamored of capitalism. So it would seem to me a very important topic to say, well, what is the future capitalism? The system that was the dominant system in the world for, roughly, thirty years is under question in almost every location and why is that? And so, that is what we’re looking at. Now, I know that we sent out some readings to the individuals who are joining us here—the academics, the students from around the country—and if you look at those readings you’ll see that we don’t really know the answers yet. And so one of those discussions was a discussion I led with Glenn Hubbard, the former dean of the Columbia Business School. And Glenn’s solution was to go back to the very early days of capitalists, to go back to Adam Smith and to adopt, as Glenn would say, the little “l” liberal view of capitalism, which is, basically, one in which he used the phrase, we should be building bridges and not walls, driving, I believe, for a kind of empathetic opening where we understood each other better and saw that we had our futures all intertwined. And so that’s, certainly, a view of, perhaps, how the future of capitalism might evolve, where it looks very much like a small “l” liberal view, going back to Adam Smith and the book that he wrote on so-called moral philosophy. If you look at some of the other readings, you’ll see that some people are saying, gee, one of the challenges that we have now is businesses are being allowed to sort of drive much of the agenda. And this discussion in businesses about the purpose of business and should it be so-called stakeholder value and stakeholder—so-called stakeholder primacy, thinking not just about the shareholders, but employees and the communities and the supply chain, et cetera. And so, that article suggested, well, maybe we really need stronger government influence as opposed to leaving the fixing of the system to the private sector, with maybe stronger antitrust regulation, perhaps, more progressive taxes. And so we have that as a question.  One of the articles looked at the most recent G-7—Group of Seven—discussion that seemed to move from the notion of free trade being best to maybe thinking about different metrics to make sure that the wealth of capitalism is distributed more evenly. I wrote another piece that said, in this period of inflation let’s make sure that we don’t go back to wage and price controls. So what the Council has been doing through these roundtables, through publications in Foreign Affairs, through posts on CFR.org, is, really, looking at and mixing up lots of different ideas, bringing many different views on what is it going to take to return to a position where everyone, both in the U.S. and more broadly, still believes that capitalism, for all of its flaws, is still the best way to organize our economic activity. At the end of the day, I think everyone would agree capitalism has done a really good job of getting us out of poverty. But the challenges now are how to think about the inequality that seems to have emerged in almost every country, and is the answer to that sort of more regulation or less regulation—more taxes, different taxes. Here in the United States, we’ve seen under President Biden a number of proposals that, while they are described as being fiscal stimulus, are really about social policy that, in many ways, are meant to fix some of the challenges of capitalism. For example, the question of should we have early childhood education as free for all—would that help to drive better outcomes in terms of income and wealth inequality. Obviously, the notion of investing more in infrastructure, particularly twenty-first century infrastructure as well as the older infrastructure is allowing us to knit the society together a bit better and maybe in a more equitable way. So it’s not just think-tank individuals and academics and business leaders, but government leaders as well are really coming to ask this question of what systems—what could we change in the system of capitalism to make it more resilient, to make it more robust, and to solve some of the issues and challenges that we’ve seen emerging only gradually over the last several years. And so those are some of the things that we’re focused on when it comes to the so-called future of capitalism. But let me emphasize that while I’m talking about this in terms of the future of capitalism and capitalism has been adopted in many different kinds of political environments—democracy, presidential democracy in the U.S., parliamentary democracy in the U.K., obviously, state-controlled in China—one of the reasons that I think, at least in the United States, we should be focused on the future of capitalism, going back to that Roosevelt quote that I started with, is that it may well be that capitalism and democracy are intertwined, and I believe that it is really very difficult, challenging, maybe impossible, to have a representative democracy where individuals go to the polling place and trust their government and trust their government leaders and trust the outcomes of democratic systems themselves if they don’t think that the economic system works well for them. Back to the point that Roosevelt was making, in societies where it looks as though the economic system isn’t working well, where unemployment lingers, where income and wealth inequality become major problems, where the individuals think that their children will not have better lives than they did, perhaps they’ll say, hmm, this is not just a problem of capitalism, this may be a problem in our political leaders. And maybe we might need a very, very different political system. And so I think, without panicking or creating hyperbole, the linkage between capitalism and democracy, I believe, is a fairly tight nexus, and some of the challenges that we’ve had, perhaps, around trusting elected outcomes, et cetera, may well be due to the fact that people feel that the economic system has worked well for a few but not for most, and they may see in many ways their lives are improved because they have new technologies and they can use Zoom and other things to communicate. But they may also think they’re stuck in a job where they are a so-called essential worker and confronting health crises and health challenges on a daily basis, and maybe that’s not the outcome that they’re looking for. And so we should recognize that this question of the future of capitalism is important unto itself. We don’t know yet the answers. But it may be tied a little bit to the question of future democratic institutions, at least in the United States. And the final point I’d make by way of opening is to say this is not the first time that we’ve seen questions of capitalism on the table. If one thinks about the economic history of the United States, there are many times when we’ve had rollercoaster rides in the economy. If we think about the beginning of the Industrial Revolution with child labor and individuals forced to work in very, very unsanitary conditions and, indeed, not being sure of the quality of food, and we had novels written about those kinds of challenges, yet, we came through that. We rebuilt capitalism in a different way. We added a social safety net. We created government agencies to think about food and drug safety. We thought about and developed laws around occupational safety and health. We created antitrust mechanisms to make sure that—in Teddy Roosevelt’s era, we had the so-called trust busting that institutions didn’t get too large. We had antitrust regulations about price fixing, for example, and rules about the hours that individuals could be made to work. And we’ve had—so we see that, at least in the United States, the capitalist system has historically righted itself when it seems to get a little bit out of kilter. So I close these opening remarks by saying while there may be some issues and questions that people have, while a number of us are even studying the future of capitalism, I, at least come at that with a sense of optimism, knowing that in the history of America, during some of the challenges when capitalism was at its roughest and most unfair and even dangerous to people, our leaders and our society stepped forward and created a kind of capitalism that was fair, more equitable, and smoothed out some of the rougher edges. So count me optimistic that the younger people listening to this and my own children will continue to live in a capitalist system. It might be a little different from what we have today. But I have every great confidence that with the goodwill of the people that we’re working with and millions of others we’ll end up with a modern capitalism that is suitable and fit for purpose for generations to come. So with that, let me stop and see if there are any questions, comments, from the audience. FASKIANOS: Great. Thanks so much, Roger. And now we’re going to go to all of you for your questions and comments. We already have a couple or several written questions in the Q&A box and raised hands. So if you are typing a question in the Q&A box, if you could also include your affiliation, that would be great. The first raised hand goes to Joseph Bower, and just be sure to unmute yourself and say who you are. Q: I’m Joe Bower. I’ve been teaching at Harvard for a long, long time. And around our centennial, which was 2008, in the run up we talked to business leaders all over the world about this problem and they identified major factors which they thought would disrupt the system. First of all, by the way, they did not talk about capitalism. They talked about the market system and—because China, basically, has a state market system. We have a private market system, which has something to do with ownership.  You’ve done a very good job of pointing out that, in fact, our government has played, historically, a very important role in influencing that system. We started dismantling that. We did not have a financial crisis in the United States until something like 2000 since the 1930s. But we dismantled that apparatus that, in fact, protected the market system and we’ve done that in a—I mean, when you and I went to school we were taught about countervailing power. That was dismantled. In a whole series of areas we have, in fact, undermined the infrastructure of law, of public health, and a whole series of pieces that made—enabled the market system. The market system doesn’t work by itself. So I would think that it’s a very hard problem and our—I have grandchildren who feel the way you described, that our system is—capitalism is problematic, but they think—they’re talking about the state arrangements. They’re not really talking about the value of markets. And I wonder if you can help us—can you talk about where your group has gotten to about that distinction? FERGUSON: Well, first—and Joe Bower is being modest. He’s—(laughs)—one of the most distinguished professors at Harvard Business School and, Professor Bower, it’s an honor and pleasure to have you here. And so, our group, I think, fully recognizes that the kind of capitalism we have here, as I think I said, is regulated capitalism and regulated free—a regulated market, so to speak, as opposed to state-driven markets or other things. I think the challenge for all of us—and you know this, Professor Bower—is in the history of America the pendulum swings back and forth, you know, on regulation. So I identified, that Teddy Roosevelt-, FDR-aligned regulation that came in and sort of saved capitalism and saved the markets at the very beginning of the nineteenth century—of the 1900s—the twentieth century. And then you fully understand that there have been periods of time here in the U.S., starting recently in the 1980s, when both parties, Democrats and Republicans, agreed that to some degree large government was the problem—that we needed to be deregulatory, and that is not—that was not one party or the other. It was a bipartisan consensus starting in the 1970s that, perhaps, regulation had become too much. And I think where you may be right and it may be part of the solution to this question of well-regulated capitalism is maybe the pendulum needs to swing back a little bit. Perhaps we do need to have—and there are folks who, certainly, think we need to have—a more progressive tax system to redistribute income. We had an election where there was debating about wealth taxes. They don’t work very well in other countries but it’s an important debate. We also, clearly, are right now having a conversation about it in the Congress under the president’s proposals about spending more on a social safety net, early childhood education. So I think you’re pointing out something that’s real important: In the swinging of the pendulum in democracy here in the United States, where that pendulum often swings around the question of how big should the state be versus private citizen initiative? How much should we have redistribution versus not? How much should we have government regulation versus not? And it may well be that is where it feels that’s part of where the debate is. And we can look back over history and say, all right, is it time for that pendulum to swing back—have we gone a little too far in the deregulatory mode and getting away from the well-regulated markets that have allowed us to be the envy of the world. So a good question, and it will be one of the things that I know we’ll continue to debate as a society and in the groups that we’re working. FASKIANOS: Thank you. So we’re going to take the next question from Willem DeVries, who got five up-votes. He’s a professor of philosophy at University of New Hampshire. You say capitalism has done a good job of getting us out of poverty. But who is the us here? Colonialism, a form of capitalism, certainly, did not help get the colonies and the colonized out of poverty. FERGUSON: Very good question. And so, to be fair, when I say global capitalism has done a good job getting us out of poverty, you point out something that’s real important, which is when economists say that they’re often thinking about a dramatically larger middle class in China. There is an intellectual class in India that is tied to global capitalism. We see in some of the Eastern European states, again, technology-driven jobs that are more middle income. And so one of the points that you’re making, and it’s one of the points that one of the articles made, is this free trade environment created by the WTO may have helped some people get out of poverty if they could get themselves linked to the U.S. economy and the U.S. engine, but not everybody. And one of the points that some of the articles made is free trade and the WTO process may have been very good in some places but there were costs paid, perhaps, here in the United States and other places in terms of jobs—manufacturing jobs, in many cases—that had existed here in the United States and then were moved overseas or moved to other countries. So you’re right to say be cautious. A global statement that millions and maybe billions have been lifted out of poverty is not the same as saying that everybody is made better off and there, certainly, are individuals here in the U.S. and we’ve had these discussions, obviously, in our process around bringing manufacturing jobs back, increasing tariffs on goods from other countries. And so, a very, very good point. And, finally, let’s be quite clear. Some of the joys that we have here in capitalism come, as you point out, from other countries that, perhaps, where they’re giving up their natural resources, where the nature of agriculture has changed, and all that to support our habits, and it may well be that there are places where individuals’ lives have been disrupted, not just in the U.S. but in other places, in a way that aren’t good. And so I think that is one of the things that drives some people to question what’s the future of capitalism when you look at global inequality and when you look at those who are feeling left behind here. So all of that is very much on the table. Thanks for raising it. FASKIANOS: Thank you. I’m going to go next to Horace Bartilow, who has raised—a raised hand, from the University of Kentucky. Q: I’m no longer at the University of Kentucky. I’m at the American University School of International Service. FASKIANOS: Great. Q: I’m an international political economist, but I am—my question today—and thank you, Mr. Ferguson. Excellent opening. Is—capitalism came from—it evolved out of a feudal era. It came from somewhere, right? FERGUSON: Mmm hmm. Q: My concern is, and don’t take my question as if I’m against capitalism. I live in a home that is, technically, owned by a bank. I’m paying a mortgage and my retirement is wrapped up in the stock market. But my concern and my question is, is that the very fact that we’re asking the question about capitalism’s future is that we are worried that it might have a future, and the question is it might not have a future and that the next stage of human evolution could be developing a system that doesn’t look like capitalism. I don’t know what that system is. But it just seems to me that from your exposition over the period of capitalism’s life there have been different attempts to make it compatible, make it more legitimate, make it more egalitarian, and then the question is what happens when we run out of options to make it more egalitarian, to make it more legitimate. Then what? Because it just seems to me that we’re dealing with a system that we are trying to tame against its own self, that if we let it be itself it could destroy itself, right. It’s almost as if you’re trying to stop an addict that needs to be fed. (Laughs.) And so what happens when we run out of options? FERGUSON: So I think to put it in historical context, you’re, certainly, true that capitalism came from someplace. As you say, it came from feudalism. That was a system that had even more brutal inequality than anything you can imagine. And knowledge evolved. Ideas evolved. You know, Adam Smith, various things, emerged, and there was a whole intellectual ferment around how the system should be or the economic system should be organized in a way that it was perceived to at least overcome some of the obvious limitations of feudalism. To be very honest and transparent, it may well be, to your point, that out of what we currently have will be a gradual evolution towards something else whose name we haven’t even imagined yet. You know, it could well be that someone’s going to write the book that’s the functional equivalent of The Wealth of Nations that Adam Smith wrote to help drive a view of the way markets should be organized or that there should even be markets. And so I think that’s—the reason we’re having this conversation is that many people, some of whom have already spoken, are looking at the current way we organize the economy kind of globally and say maybe there is a better way. And so, the process of talking about the future of capitalism is to start with what we understand and, in your word, taming the beast. So we’ve seen this beast in operation for, roughly, three hundred years. We’ve tamed it many, many different times—creating new institutions, central banks, creating new laws, creating progressivism, all of which has tamed capitalism, so to speak, to use your analogy. And so I think we’re in the process of seeing how that we can continue to do that. You may be right that someone, an Adam Smith type person or whoever she may be, may come along, imagining a brand new world and all of us will rally around that or our children will. But right now, perhaps because of the lack of creativity or imagination, I think we are attempting to do what our forefathers and predecessors did, to your point, continuing to sort of manage and tame this beast as best we can. The reason I think that’s important is we also know that there were—there was a different view of how to organize economic activity called communism. That, obviously, didn’t work very well. And the point that I made, and I think Joe Bower jumped in as well, even in so-called communist China they adopted a market system allowing elements of capitalism to flourish. So the other reason, I think, to continue this discussion is we did have an experiment with a different system and the folks under that system, clearly, didn’t like it and it eventually fell on its own weight. So, right now, having had that experience, the absence of, that author who is going to imagine the new future, I think it behooves us to see, to your language, if we can continue to evolve this one to hold on to some of the strengths and ameliorate some of the obvious problems. FASKIANOS: Thank you. I’m going to go next to Kate Landino, who is an undergrad in—majoring in political science at Skidmore College. One of the main reasons capitalism is under fire is that it’s benefiting some and oppressing most. How would you suggest that within the U.S. we can address the wealth gap and redistribution of wealth within the capitalist system? FERGUSON: Well, look, we know how to do that is through taxes, and the challenge is always—and it’s been challenging us forever—how much should we tax the rich and redistribute and is there a point at which individuals say, oh, gee, I know I don’t want to work because that last hundred dollars, thousand dollars, whatever, is mainly going to the government and not staying with me. And to be quite clear, we had a point in this country when we didn’t have an income tax and that required a constitutional amendment to drive it. We’ve had periods when the marginal tax rate—the tax rate on the last $100,000 whatever the number would have been at the margin—was well over 50 percent, in some cases 70 percent, and that was true in the late 1950s and the early 1960s. So, John Kennedy and his team came in and reduced the marginal tax rate and that drove quite a bit of growth. We’ve had more recent tax cuts where some people felt you’ve gone too far. And so I think we know how to deal with this question of income inequality, at least, and redistribution, and the main way that we do it is through the tax system. Now, having said that, you could also look overseas because people have talked about taxes on wealth, and it turns out that many countries have tried that. Right now, I think, only two other major developed countries are using it. Many tried it and reject it—rejected it. So, we can also learn something about tax structures that, perhaps, didn’t work as well as their creators had hoped. And the final point I’d make is, even at our marginal tax rates one can look to Europe—when I say our I mean in the U.S.—one could look to Sweden and the other Scandinavian countries to see countries that have a much higher tax rate and they seem to do all right with that, and maybe we can learn and understand how that works as well. So the answer to your question is it all runs through the taxes. It’s a big debate here in the United States and has been going back to should we even have an income tax, and I expect that, and we saw it in this most recent election, we’ll continue to debate what’s the right level of taxes to do what we want to do when many of us, I think, want to maintain the capitalist system, but to your point, smooth out the edges so that it doesn’t feel as though a few of us benefit at the expense of others. FASKIANOS: Terrific. I’m going to go next to Ken Mayers, who is a senior adjunct professor at St. Francis College. You mentioned different forms of capitalism in your introduction and Professor Bower mentioned different market systems. One can argue that all systems are mixed and that systems in many places around the world today involve mixtures that include elements of oligarchic capitalism. Can you point us to people within your group who are taking the role of oligarchic capitalism in the emerging future of capitalism globally into account? FERGUSON: Well, so this project started with a paper that I wrote with my research associate, Upamanyu Lahiri, and we identified six types of capitalism in the world and they may be market systems, to pick up on Professor Bower. So, in the U.S. we describe that as a regulated market system. In Western Europe—we’ve heard her talk a little bit about it—it has more of a social democratic nature to it but very much capitalism, not too much state ownership; a bit more than what we have. I would describe Russia as, to your point, an oligarchic capitalism. You know, some people would say that. We looked at Japan, and I think I would describe that as being a collective kind of capitalism. Obviously, China, to Professor Bower’s point, I think, is very state-directed capitalism, and we have in other countries a bit more of a bureaucratically-driven capitalism. So that is where we’re thinking about it. We’ll have someone talking on each one of those. I would say most of us don’t believe that an oligarchic capitalism where a small number will get the wealth of the society, an even smaller number than we have here—that doesn’t look like it works. It, certainly, doesn’t feel—if we’re worried about the inequality of the current system we have in the United States imagine if we had a system where even a smaller number of people controlled the major industries and were not paying taxes. So we will take a look at all of these. I don’t think we’re going to look to an oligarchic capitalism system as the way that we want to go because the evidence suggests that that probably is not the best for the vast majority of people. But we will, certainly, look at all of them and figure out if there is, to your point, an admixture that works better for more people than what appears to be the case now for many. Thank you. FASKIANOS: Next one is Valerie Luzadis, who is at SUNY Environmental Science and Forestry at Syracuse in New York. One might easily understand that climate change is a direct result of the dominance of capitalism in which homogenization requires additional use of energy to homogenized globalization. When considering this, huge questions arise about the ability of the offending system to, truly, address the problem, especially when the power distribution is not adequately addressed. Comments? FERGUSON: Well, I find that very interesting because it feels to me, after some fits and starts, that there’s a consensus that’s emerged that we have to confront climate change. Some folks may still debate is it man—is it caused by human interaction, what it may be. I think, in general, the consensus is we must figure out numerous ways to attack this problem. To put it another way insofar as climate change or climate degradation is due to a market that doesn’t work very well, we’re finding people say we need to create a new market. We’re finding investors saying we must invest in—in mitigation processes. We find shareholders saying to companies, what are you doing about this topic? It feels to me as though a consensus is strongly emerging that this is an existential threat, and what I find fascinating is some of the answers are regulation, but some of the answers are also markets. And, how that’s going to work I’m not sure. But, there’s a great deal of talk about putting an adequate and accurate price on carbon, which would drive up the price that we all pay for, a number of commodities and services that are driven by, the use of carbon for energy. There is an ongoing effort to create a better market for what’s called carbon offsets—using different ways to reduce carbon in the atmosphere and paying people to do that. So I actually find it fascinating that this big existential issue is being confronted more directly now than ever and that some of the answers are around regulation but some of the tools of capitalism are being called in to help drive solutions here. And so this feels to me as though to some people, many of us, it took too long to get there. It feels to me very much as though this is a place where insofar as climate change is being driven by poor markets, there’s an effort to make better markets as well as better regulation to drive as quickly as we possibly can a solution to this really daunting and, potentially, existential challenge. FASKIANOS: Great. The next question comes from Steven Jones, who’s at Georgia Gwinnett College. How would you respond to critics of capitalism such as Piketty, who advocated transition from capitalism to socialism? FERGUSON: Well, look, I think we start by saying, as Piketty did, what is the thing that seems to be the fundamental Achilles’ heel of capitalism, and I think all of us agree—and it’s come up a few times and Piketty and his co-authors have identified it as well—which is the tendency in capitalist systems for income and wealth to become increasingly unequal. Now, we know how to deal with that. As I said, it’s through tax arrangements, different kinds of tax arrangements, and all of them don’t work equally well, and so we can create an overlay that ameliorates those effects. Now, is that still capitalism? I would argue it’s, certainly, still capitalism. Just as we have more progressive taxes in Scandinavia and other places, they still have, fundamentally, a capitalist system where it’s still primarily individuals who control the means of production, if I were to use that phrase. And so I think we should be cautious here that just looking around the world there are already different types of capitalism and we’ll probably end up picking and choosing—every country will probably pick and choose. And I wouldn’t be surprised if we start to sort of coalesce globally around a kind of capitalism that meets some of the challenges of inequality as best we can without creating so many disincentives in the private sector that we also don’t have the opportunity to have the kind of really creative growth and development of new ideas and new technologies that we’ve had. So that’s sort of the way I think about it, and when I read Piketty’s work it feels to me as though what he’s looking at is something that’s a more European-style capitalism with more progressive taxes and I don’t know if one wants to call that socialism. I think that’s a little strong. Socialism involves state ownership of many of the means of production. But it may be what he’s talking about is something that looks like a social democratic kind of capitalism, which major societies have found quite comfortable and quite amenable. FASKIANOS: I’ll take the next question from Gabriela Rivera, who’s an undergrad at the University of Notre Dame majoring in economics and global affairs. To what extent do businesses influence environmental and social change? Is a massive change needed to create equity and reduce carbon emissions possible through corporate responsibility without extreme government regulation? I think you did touch upon this. But— FERGUSON: Yeah. So one of the articles talked very much about that, and I guess I believe it’s a both/and. So I think we need governments to set regulations, as we’ve had in the past. One of the best government regulations that we had was around sulfur dioxide emission when we had a big concern about acid rain, and so we’ve seen the government can set regulatory constraints. We’ve seen governments setting—creating markets that deal with some of these problems, and we also need, as we do now, as we have now, to have companies that are also voluntarily thinking about how to reduce their carbon footprint. So I think the answer is a both/and. We still need government regulation. We’re going to need markets to be created to give prices to carbon that all of us will have to pay to consume less of it. But we also need—and we need businesses that understand they’ve got a responsibility to manage their carbon footprint and they’re doing that—these businesses—in part because their investors are asking for it, their consumers might be asking for it, and, certainly, in many cases, their employees are asking for it as well. And so, I think one of the good things about the current system is pressure, internal and external, can get businesses to think about these big long-term issues as well as having government regulation and having new markets come into existence. FASKIANOS: Great, and I—that does segue nicely into Dick Cavanagh’s question from Harvard. How does stakeholder capitalism address economic inequality? FERGUSON: We’re very lucky today because we have distinguished Harvard professors and I—total transparency, I’ve known Dick Cavanagh for decades. So, I think it’s very interesting to me to think about economic history, that there is a great deal of talk about that famous Milton Friedman article that said the purpose of businesses is to make a profit and that drove this notion of shareholder capitalism was always the dominant capitalism. Well, the truth of the matter is—and you know this—there were always people that said, oh, wait a minute, businesses have other responsibilities as well. And I think, for sure one cannot create a long-term viable business without thinking about impact on the environment, impact on communities, impact on employees, and all that is wrapped up in this new concept of stakeholder capitalism. But there’s always been that discussion, as you well know. And so I believe fully that the resurgence of the question stakeholder versus shareholder is a good thing and my view is that businesses have always been forced to think about their environment, think about their shareholders, thinking about their stakeholders, as it’s now called, in order to be successful. And, ironically and most importantly, you know and all of us know the story of Henry Ford, who raised the wages of his workers so they could afford to be good consumers and wanted to buy his automobiles. And so this notion of stakeholder capitalism goes back in the history of America and I think it’s one that’s been resurfaced and I think it’s an important way to think about the future of capitalism. FASKIANOS: So this goes to the next question from Deborah Burand, a professor at NYU Law. We’re in proxy season now. Do you see the market increase in shareholder proposals in 2021 related to ESG and the support many of those proposals garnered as another way that markets are moving to fill gaps or augment shifts in corporate purpose? FERGUSON: Absolutely. Again, as a person who believes that capitalism will continue to right itself, that is one of the examples. So, shareholders, particularly, our large institutional shareholders, fought to get proxy access, fought to get say on pay. We’re now finding that they are voting around some of these social issues quite a bit more. We’ve also seen a case of a small fund—I think it’s called Engine No. 1—getting access to the proxy at ExxonMobil and, I think, replacing two or three of their directors. And so, through capitalist mechanisms and through the ownership of shares, which is an essence of private market and private capitalism, we’re finding individuals, institutional shareholders, and others really forcing change even to some of our largest, most important, and historically iconic companies. So I do think that you put your finger on one of the ways that capitalism is righting itself, which is using a capitalist tool, the proxy. FASKIANOS: Great. The next question from Skyler Ruderman, who’s an undergraduate student at University of California Santa Cruz. You mentioned earlier the linkage between capitalism and democracy as almost being inherent, yet we see that the United States is propping up or supporting dictatorships like Pinochet, Suharto, and kingdoms like Saudi Arabia, protects or advances financial interests of the state and its major corporations. Given this direct link between authoritarianism and capitalism, along with the drive within the U.S. to inhibit voting and with historic regulations around restricting voting and participation in democracy, can we say capitalism can be conflated with democracy? FERGUSON: So I think what I said was it’s hard for me to imagine that we’re going to continue to have sort of a well-functioning representative democracy if people think that the system doesn’t work for them economically. That is back to that 1938 quote from Roosevelt and I agree with that. So one of the reasons that it’s important to drive an improvement in capitalism is that people have got to believe that the system, broadly written, is fair for them, and in a democracy, if you don’t believe the system is fair, what do you do? You go to the ballot box. You may end up listening to the most extreme voices and that, potentially, could lead to an unraveling of capitalism and democracy, and that was sort of the point that Roosevelt was making. I want to associate myself with that point, that there’s a certain amount of determinism that comes from economic outcomes that in a representative democracy spills over into, frankly, the democratic system. Having said that, I’m not in a position to defend every foreign policy decision that was made back in the 1970s about supporting dictatorships in different places. And, to the point around the hydrocarbon economy, there, obviously, are decisions that people make and the markets make around supporting different governments, different regimes, in part to get hold of raw materials that are necessary. I can’t defend or attack any structure of government any place. But you, certainly, make a point to observe that in the history of the United States we’ve had various different kind of alliances that maybe to the modern eye don’t look—isn’t that consistent with who we are and what we stand for. On the question of voting, I’ve said publicly and signed letters that say that literally, 1.3 million Americans, I think, have died in various wars defending democracy and the right to vote, and I continue to believe that that’s a sacred element of our democracy, to have everyone have access to the ballot. I grew up in the civil rights era when people, literally, were killed, if not beaten, around this question of access to the ballot. So, count me fully committed to having the largest possible legitimate vote that we possibly can. And I emphasize legitimate vote and as large as we possibly can, because I think that’s one of the hallmarks of democracy and because, as I said, more than a million Americans have died so that all of us had the right to vote. FASKIANOS: Thank you. There are many more questions but we only have time for one because we have a hard stop to let you prepare for your 2:00 p.m. So I’m going to give the last one over to Laila Bishara, who is an assistant professor at SUNY Farmingdale, teaching international business. Your thoughts on the role of educational institutions to lead on ESG issues and, hopefully, its impact on industries. I think this is a good way for us to close. FERGUSON: Absolutely. So I have said many times that education in general is the great leveler. It brings all of us up. I, personally, have benefited from that, and I fully understand that education institutions are often where some of the rough and tumble as we move forward goes forward. So I’m not at all surprised to see that on educational campuses, educational institutions are driving some of the heaviest debates around ESG. That was true when I was a student back in the late 1960s through the 1970s. One of the great joys of universities is that is where ideas are felt most passionately and people sort of drive to make change from the academy, both the students and faculty. So, I fully expect to see more of that because that’s simply one of the great benefits of having the kind of robust higher education systems, the state schools such as SUNY and with private schools as well, driving all of us to think more critically about what we do. And, by the way, I also think that a functioning democracy depends on individuals capable of thinking critically for themselves, based on having a solid foundation of a liberal arts education with the right degree of science and technology and math and engineering as well. FASKIANOS: Great. Any last words before we close, Roger? FERGUSON: Three things. One is I really want to thank all of you. I know we didn’t get to all the questions but, clearly, a very, very thoughtful group with wonderful questions. Two, this is really an important topic for all of us to engage in, not something that the elite can establish but all of us need to have a point of view about our system. And three, I continue to be optimistic, knowing that there are weaknesses and failures.  We’ve tried other solutions. None of them would seem at this stage better than capitalism. Something better may come along. But until that happens, I, at least, will continue to try to think through how we can improve the capitalist system that we have. FASKIANOS: Great. Thank you, Dr. Roger Ferguson. We really appreciate your taking the time to be with us today. Again, my apologies to all of you for—who had your hands raised and we couldn’t get to them. But we will have to invite him back to talk about how his project is going. So, as I mentioned at the outset, we will be posting the video and transcript to this so you can revisit it or share it with your colleagues who are unable to join.  Our next Academic Webinar will be on Thursday, March 10, at 1:00 p.m. Eastern Time with Rose Gottemoeller, who is at Stanford University, talking about international security and cooperation. Please continue to follow us at @CFR_academic and visit CFR.org, ForeignAffairs.com, and ThinkGlobalHealth.org for new research and analysis on global issues. Again, thank you all for being with us, thank you to Dr. Ferguson, and we hope you have a good rest of the day. (END

Afsaneh Beschloss discusses her distinguished career in finance, including her roles as founder and CEO of RockCreek, a leading global investment firm, her time as treasurer and chief investment officer of the World Bank, and as managing director and partner at the Carlyle Group. Lessons Learned is a roundtable series, open to term members and younger life members, which features distinguished speakers who reflect on their career experiences, the choices they made along the way, and the lessons they have learned from them.

Panelists discuss how companies can focus on long-term value creation while meeting shareholder expectations for quarterly profit, whether capitalism should be reformed to encourage companies to ensure durable growth and sustainable investment, and how companies can plan and invest for the long-term while managing short-term pressures.  

The 2021 Robert B. Menschel Economics Symposium discusses how behavioral economics can help explain decision-making during a pandemic. The full agenda is available here. The Robert B. Menschel Economics Symposium, presented by the Maurice R. Greenberg Center for Geoeconomic Studies, is made possible through the generous support of Robert B. Menschel.