The Great Degeneration: How Institutions Decay and Economies Die

[Music] hello and welcome to the Hoover institutions 2014 spring retreat I'm Kris Tower Hoover's director of marketing and strategic communications our speaker in this podcast is Neil Ferguson a senior fellow at the Hoover Institution and the Lawrence a Tisch professor of history at Harvard University the title of his talk is the great degeneration how institutions decay and economies die and it was recorded on May 6 2014 oh thank you very much indeed Steven it's always tricky to follow eddie lazier what do you say when he's said it all what I'm gonna try and do is to offer you some insights from my cheerfully titled new book it's a huge pleasure to be back at Hoover I've never felt so acutely the need for this institution when there are threats to Liberty around the world of all shapes and sizes at home and abroad we are doing hugely important work here and your support of our efforts is enormous Lee important if this wasn't the Hoover Institution but say some left-of-centre version of it you might be listening to my former boss Larry Summers talking about secular stagnation and blaming it on insufficient fiscal stimulus as if there were some fiscal way of keeping growth rates up at levels pre-crisis which were obviously inflated by a bubble or you might be listening to the latest a pin up of the liberal left Thomas Piketty explaining to you why inequality is the scourge of our time I kind of which he was here because then I can ask him why his own data show and this chart is rather telling that the problem of of wealth inequality is in fact greater in Europe than in the United States right now as was true a century ago despite of course the creation of far more progressive welfare states in Europe but neither Larry nor Monsieur Piketty are here and so we can worry about serious issues this is what I worry about you may have read in the newspapers in the last week that according to at least one measure of gross domestic product which adjusts adjusts for purchasing power parity China has already overtaken the United States as the largest economy in the world even if you don't buy those calculations the IMF's latest World Economic Outlook using the same measure says it's going to happen in the next few years this is a hugely important development however you crunch the numbers even if you prefer to do the calculation on a current dollar basis it's pretty clear that this is the big trend of our time and when historians 30 or 40 years from now look back they I think will be far more concerned with this huge shift in the global economic balance of power than with insufficient stimulus or rising inequality the reason I think this is that what we are living through is the biggest shift in economic history for half a millennium take a moment to look at this chart what I've done here is to calculate some ratios of per capita gross domestic product and the idea here is a relatively simple one what you're trying to do is and the point is not very bright but what you're trying to show is that from the 1600s if you simply calculate the relationship the ratio of American to Chinese per capita income there is a really quite amazing trend that carries all the way from the 1600s right down to the later 1970s in 1978 which is the beginning of the era of economic reform in China by this measure the average American was 22 times richer than the average Chinese that was what has been called the great divergence it's the single most important information you need to know about economic history that's the economic history story and it's not just a us-china story it's essentially a West East story over 500 years Westerners got much richer and healthier and more powerful than Easterners in our lifetime as the chart shows you that has changed and with dramatic speed economic history has changed direction so that the average American is no longer twenty-two times richer than the average Chinese she's actually five times richer and if you look ahead as the OECD did in a recent study to the middle of this century that ratio is gonna fall according to the best projections we have below two-to-one so this is a great reconvergence in economic terms and of course those per capita data are only telling you a part of the story on present trends by the 2050s the Chinese economy will not just be the largest economy in the world it will be by far the largest economy in the world over the last two years I've spent a lot of time thinking about why this has happened and I've had to come up with a two-part answer to the question development economists can tell you a story about why the East has caught up with the West in terms of improved institutions and broadly speaking a lot of work and development economics is about how relatively poor countries get richer by improving their institutions in particular making markets institutions more powerful in their economies that's really the core of the Chinese economic miracle but it struck me as I was reading my way through this literature that there was a simultaneous but different process at work and that process was the process whereby rich countries with good institutions end up with worse ones I'm all in favor of the process number one whereby poor countries get richer by improving their institutions but I am not in favor of process number two whereby rich countries get poorer by making their institutions worse a few years ago I published a book called civilization which tried to explain how the poorer countries of the world had improved their institutions by essentially copying what I called the six killer applications of Western civilization and in order to save you the need to read the book I've summarized its argument in a single slide you still have to buy it though the dealers list you still have to buy the book but you don't necessarily need to read it from cover to cover though it's actually quite a good read there were six things that developed in the Western world from around the thirteen or fourteen hundreds that did not really exist anywhere else in the world and it was their development that made the West much richer than the rest beginning in Western Europe and then gathering momentum when West Europeans settled in places like North America the idea that comp tition is legitimate and power should be not be monopolized economically or politically was killer app number one the Scientific Revolution the notion that we should use the experimental method to try to understand the natural world systematically again was a Western innovation the notion that the rule of law should be based on private property rights was one other crucial Western innovation the modern medicine that doubled life expectancy arose almost entirely in the West the idea of the consumer society the notion that we should all have more than one set of clothes indeed we can have as many as we can stuff into a wardrobe was a Western innovation by the way without a consumer society there is no point in having all the productivity gains that we associate with the Industrial Revolution and afterwards finally the work ethic a hundred years ago Max Weber thought still that the work ethic was exclusive not just to the West but to a particular part of the West the Protestant north of Europe and north of America what has happened and in the case of countries like China it's happened relatively recently is that the rest of the world has finally downloaded the killer applications of Western civilization because it turns out that they were open source it wasn't difficult to copy them and those non-western societies that have copied the most faithfully have achieved the most rapid growth Japan was the first to do this and it was followed by quite a few other East Asian societies before the notion of copying Western institutions finally took hold in the biggest of them all in China process number one that process were by the rest of the world acquires better institutions is as I said a cause for celebration but process number two what I've called the great degeneration the process were by sophisticated and advanced is like the United States get worse institutions is a cause for alarm and the argument of the great degeneration is a very simple one the argument is that there are four distinct ways in which our institutions are degenerating one an L Eddy already alluded to this there's a fundamental breakdown of the contract between the generations two we are in the grip of a pathology of excessively complex regulation three the rule of law has given way to the rule of lawyers and for our civil society which used to be the envy of the world is itself in a state of rapid decay now you've been listening to a great many monologues in the last couple of days and I want to leave time for discussion as well as time for you to stagger out of this tent into the sunshine to recover so I'm going to rattle through these four points then tell you some good news and then give you the sting in the tail how does that sound okay it's really straightforward actually some of this you already know but let's just put it very clearly when people talk about the fiscal crisis of the United States they are not talking about the fact that the 1% is not paying enough to the 47% that is all an illusion the real inequity is intergenerational it's the baby boomers I'm afraid that's us folks who have been essentially consuming at the expense of future generations the young and the unborn and that is what I meant when I said that there's been a breakdown of the contract between the generations my good friend Larry Kotlikoff did some calculations recently asking what you'd have to do to achieve generational balance in the United States by which he meant to ensure that future generations pay the same amount of tax and receive the same kind of benefits as we all do or will and the answers staggering you would have to introduce an immediate and permanent increase in all federal taxes of the order of 64% or cut all government spending across the board by 35% oddly enough these policies have not yet been adopted by any candidate for election in this country the point is simple we've created massive general generational imbalances most obviously in the systems of health care and Social Security and nobody is willing to pony up therefore the bill will fall to you on future generations there are a whole bunch of ways in which this economy is stacked against the generation of my kids and my grandchildren but I think this is the biggest one a great deal of illusion persists about the health of federal government finances because of a temporary improvement not unrelated to the sequester that was imposed on the administration by Congress even with those cuts and even with the tax hikes there have been it is still highly unlikely that the federal debt will remain at its current still historically high level of around 75 percent of GDP the Congressional Budget Office did a whole bunch of long-term scenarios looking ahead to 2038 I went through the report very carefully I looked at all the scenarios that they listed there were only three out of 13 in which the debt would come down between now and 2030 eight and those were all politically unimaginable involving extraordinary breakthroughs in Congress either on taxation or on spending in a worst case scenario we're looking at an explosion of the debt to GDP ratio taking it up to what would be the unprecedented level of a hundred and ninety percent of gross domestic product that's a really ugly slide I just showed you but I needed to show it to you so that you're aware that the balance of probability remains that the debt will continue to grow and with every increase in that debt the burden on future generations is growing point two we have lived through an extraordinary era of regulation there was only one period in modern times when the Federal Register which is a great and simple measure of the volume of regulation because it's the it's the volume that contains all the regulations only one period when the Federal Register shrunken size and that was Ronald Reagan's presidency in every other presidency go all the way back to franklin roosevelt regulation has grown faster in volume than the economy and you can see by just how much by comparing the growth and the size of the federal register with the growth in real gdp some of the things we just heard about dodd-frank the affordable care act are symptoms of a profound malaise in which government generates every year ever more regulations of ever greater complexity this is a pathology which is having already negative impacts on our economic performance there only are about 20 countries in the world where the ease of doing business has deteriorated since 2006 if you look at the World Bank data on ease of doing business and the United States is one of them what I've done here is just to compute how many days it would take to go through sequentially the procedures that are measured by the World Bank start a business collect a debt get an export license all that kind of thing imagine you had to do them one by one in order and then look how many days it takes and compare 2013 with 2006 in the United States there's actually been a near 20% increase in the in the amount of time it would take you to do that stuff so the United States is in great company with Burundi and Zimbabwe a tiny minority of countries in the world where the ease of doing business is going the wrong way where it's getting harder to do business okay put your hands up if you're a lawyer this is the this is the usual way in which people answer that question there was a time when everybody regarded the rule of law as one of the glories of the United States but the combination of evermore law not to mention even more regulation here's just the the tax law which already is mind-boggling in its size and complexity and the growth of the tort system as a source of revenue for lawyers means that the United States now has not got the best rule of law in the world by any means it has the most expensive rule of law that's probably for sure but it's not the most efficient and it does not deliver justice in the way that we would like to see this relates to a more general point which is captured in some interesting international surveys of institutional quality but we talked about institutions and the great Doug North has taught us so much on that subject we're talking about a whole complex of things of which the rule of law is only one in my experience many Americans still assume that they have the best institutions in the world in fact when I first tried to present some of this evidence in front of a congressional committee the ranking Democrat on the committee who waited until my all testimony was over before he arrived insisted win number one but actually the United States is not number one in any of the global rankings of institutional quality nowhere close and let me illustrate the point by taking some some data from the World Economic Forum's Global Competitiveness Index what you have here is just over 20 different measures of institutional quality going down from the protection of private property rights to the reliability of the police corporate ethics the top country is listed here in this column it's Finland New Zealand Singapore New Zealand Singapore singer not the United States you'll notice oh I've been given a lightsaber Stan pack Oh eat your heart out Darth Vader so the USA score is here the USA rank is here and the u.s. is actually only in the top ten in one of the 22 categories Hong Kong beats the United States in every single every single category of institutional quality so we have to face the fact that institutionally we're not number one nowhere close because our institutions are deteriorating not only are our institutions deteriorating but almost as a corollary of that civic society or civil society is declining what do I mean by civil society well things like this we want brought together by government we came together voluntarily because we share common goals and values such institutions as the Hoover Institution used to do most of the heavy lifting in American society when Tocqueville visited the United States in the 1830s that was his big takeaway how Americans do everything themselves for every single problem they have an association some kind of institution that they set up themselves they're not like Frenchmen who expect the government to do everything sadly it's no longer true Putnam's book Bowling Alone pointed to the collapse of voluntary associations our in the United States in our generation since he published it that trend has only continued and you can see in this list of the different kinds of voluntary associations that that we can document the charitable professional environmental and so on that there's continued contraction and smaller and smaller percentages of Americans involve themselves in these different voluntary associations the fact that we have an ever-rising proportion of the population in receipt of Social Security invalidity benefits cannot just be explained in terms of demographics because look the age group to which I belong people in their late 40s early 50s is increasingly reliant on these kinds of benefits nearly 6% of people my age get Social Security invalidity benefits despite the fact that labor has got a lot easier in case you hadn't noticed there's a lot less literal heavy lifting in our economy and in theory we should all be healthier than previous generations God knows we spend enough on health care but here's the thing that really gives you pause let's look at how the next generation is performing shall we the piece of study steps a standardized examination in math for teenagers 15 year olds all over the world since they started to include the Shanghai District of China it's been clear but Chinese students at least in that part of China do a lot better than American students but this is the killer slide because this adjusts for parental occupation you won't be surprised to know that there is a correlation between parental occupation and performance in school but even when you allow for that even when you separate out at the children of professionals from the children of manual workers the Chinese students win indeed the children of unskilled workers in China do better in this math test than the children of professionals in the United States even the poorest Chinese kids are doing better at math than the best off American kids when I saw this chart I almost fell off my chair this is scary this is what a great degeneration looks like that word degeneration I use quite deliberately to make you think about our generational problems because the generational problem by definition is the problem of America's future I promised you some good news you can get Starbucks in the Forbidden City and China is not necessarily a problem free zone let me tell you about China's six killer viruses very briefly their demographics are worse than ours they're aging faster their financial system is now more leveraged than ours was in 2007 just looking at credit as a percentage of gross domestic product their financial system may be on the brink of a crisis that was a bank run just a few weeks ago I suspect we may see more of those and they are a long way from having anything resembling the rule of law by any measure that's the killer app that China has not yet downloaded we all know about their air pollution problem it's not the world's worst that would be Mongolia in case you're planning a trip there but a really interesting problem that gets discussed much less than it should as their rising energy dependence you all heard I'm sure about our rush to energy independence and that's a great and exciting thing here I can show you it looking at the production surplus or deficit as a percentage of consumption the u.s. goes that's the red line from huge deficit into surplus within a matter of years but the really interesting geopolitical trend is the China is surging from surplus into deficit and I think Chinese energy dependence is going to be a bigger story than US energy independence so before we assume that the future belongs to China let's bear in mind those six killer viruses that seemed certain to slow China down there's light in the gloom just as there was light during Hurricane sandy albeit from the goldman sachs offices depicted here that was my favorite photograph of that whole that whole horrible crisis you know what when you drill down county by county state by state there is a recovery in America jobs are being created in parts of this country they're shown here on this map the dark blue spots are the places where jobs have been created despite all the bumps of the financial crisis what is really interesting to see is why some states in this country are growing and here I have them ranked in four different surveys of business climates and friendliness to small and medium sized enterprises and it's the same states that pop up in the top ten in nearly every case states like Texas that crop up north corrupt Carolina North Dakota that crop up in survey after survey it's so simple but it doesn't get said often enough institutions matter and where states have good institutions where they encourage business jobs are created and when states have bad institutions the opposite happens take a look at the worst down there in the bottom that list there is a list of ignominy because these are the states least friendly Oh number 38 California come on down these are the state's least friendly to small and medium-sized enterprises in this country my story is simple institutions are crucial improving them it's what you do if you're a poor country that wants to get rich if China doesn't figure out its institutional problems particularly the lack of rule of law and meaningful property rights it will not become by far the biggest economy in the world it will hit a ceiling and it may hit it soon but by the same token if we are complacent about our institutions if we allow our liberties to be quietly eroded by the fiscal burden sharing or rather burden passing between the generations by excessively complex regulation that strangles enterprise by dysfunctional system of law that encourages frivolous lawsuits that are a kind of extortion racket and if we allow our Civic Society to fade away and let the state take on all responsibilities then we will not deserve to be number one again I don't often quote John Kerry in fact this is the only time I've ever done but he said something very true without quite meaning to shortly after his appointment of Secretary of State he was addressing a group of students in Berlin and I think he was trying to make a joke never try to make a joke in Berlin because his audience studiously wrote down what he said nodding their heads in America secretary Kerry said you have a right to be stupid if you want to be our tragedy is that every day in Washington DC our politicians are exercising that right to be stupid and that's what needs to change thank you very much indeed I'm Chris tower for the Hoover Institution thanks for listening for more information about the Hoover Institution please visit Hoover org [Music]

Channel: Hoover Institution

Views: 19,069

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Keywords: degeneration, economics, United States, China, civilization, decline

Id: 3Led-EqqSJI

Length: 31min 59sec (1919 seconds)

Published: Fri May 30 2014