Chrystia Freeland

Behavioral economist Dan Ariely of Duke University came into Reuters today to talk to Chrystia about his new book and some of his recent research on income inequality.

Ariely, along with Michael Norton of Harvard Business School, conducted a survey to determine what level of inequality Americans tolerate if their incomes were randomly assigned, an equilibrium that philosopher John Rawls called the “just society.” The duo asked nearly 6,000 Americans to guess what percent of wealth they thought was owned by each of the five quintiles of income levels in the United States and what their ideal level of income distribution would be. Then, Ariely and Norton presented the respondents with three unlabeled charts showing–unbeknownst to them–the distribution of income in a perfectly equal society, the United States, and Sweden, respectively, and asked which society they would choose to live in.

The results were quite shocking:

First, respondents vastly underestimated the actual level of wealth inequality in the United States, believing that the wealthiest quintile held about 59% of the wealth when the actual number is closer to 84%. More interesting, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution, reporting a desire for the top quintile to own just 32% of the wealth

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The (unlabeled) United States distribution was far less desirable than both the (unlabeled) Sweden distribution and the equal distribution, with some 92% of Americans preferring the Sweden distribution to the United States.

He summarized his research findings for Chrystia in the following way:

I think what politicians often do is cover things with layers of words that in many ways obscure the topics. ‘What about taxes?  And what’s your opinion about abortion and social mobility?’ But when you look deep down, it turns out Americans really believe in much more equality than we currently have. And this kind of gives me hope that as long as we can get a discourse to be more about the beliefs, we might get something better.

Posted by Peter Rudegeair.

Chrystia wrote an essay for Foreign Policy’s Top 100 Global Thinkers Issue on the economists and financiers whose ideas survived the financial crisis:

In a letter to shareholders written just after the dot-com bust, Warren Buffett observed, “You only find out who is swimming naked when the tide goes out.” The 2008 financial crisis had a similar effect on our economic and financial gurus: It revealed whose thinking was based on whiggish, End-of-History assumptions about the essential triumph of Western democratic capitalism and whose mental framework admitted the possibility of radical disruption. The thinkers whose intellectual — and maybe even psychological — starting point was that Western market democracy is neither perfect nor eternal turned out to be much better at foreshadowing the financial crisis, and it is those thinkers whose ideas are the most relevant today, in the uncertain, post-crisis world.

These specialists in uncertainty are a broad church: They range from academic economists who saw the crisis coming, like New York University’s Nouriel Roubini and the University of Chicago’s Raghuram Rajan, to philosophers of finance like George Soros and Mohamed El-Erian, who have made huge market bets, as well as intellectual ones, on how bubbles are formed and how they burst. One striking similarity between many of them is that they have seen regime change up close.

The most dramatic example is Soros, whose formative life experience was the Nazi invasion of Budapest when he was 13 years old. That trauma taught him two things: that the world could change overnight, and that those, like his beloved father Tivadar, who responded to that upheaval instantly were the ones who survived. Roubini, who is sometimes caricatured as either Dr. Doom or the Hugh Hefner of the dismal-science set, is likewise best described as a specialist in revolution. He spent his childhood being moved around volatile parts of the world from Istanbul to Tehran to Tel Aviv — and began his career as an economist studying the 1990s emerging-markets crises in Latin America, Asia, and Russia. El-Erian, Rajan, and Daron Acemoglu, a widely cited young Turkish economist, also have both personal and professional experience of rapidly, and sometimes traumatically, changing social and economic orders.

These men were all born or at least partly raised outside the United States. That is surely no accident. In the 20th century, and even in the 19th and 18th, America was the world’s laboratory, the place where many of the best, and most revolutionary, ways of organizing government and the economy were being worked out. The United States is still the world’s most powerful country and most intellectually vibrant — after all, these global thinkers now make their home in America — but partly because the United States is so big and has been so prosperous for so long, American-centric thinkers have been relatively slow to spot the challenges to the Washington Consensus and offer coherent alternatives.

Being a “global nomad,” as Roubini calls himself, has another intellectual advantage. Thanks to communism’s collapse, the lowering of trade barriers, and the technology revolution, the world economy is more interdependent than ever. This group takes America’s connection to the global economy as the starting point for its analysis — hence El-Erian’s emphasis on global financial imbalances (also a signature theme of Martin Wolf‘s Financial Times columns) and the relationship Rajan traces between rising income inequality and its U.S. political manifestation in subprime mortgages.

This crew is all about big ideas and the big picture — their frame of reference is global, and their intellectual strength is their ability to understand that entire economic systems can, and do, collapse. Paradoxically, the opposite impulse is simultaneously in fashion: You might call it the economics of small steps, an approach that eschews the big theory altogether in favor of smaller, achievable, and, crucially, measurable proposals.

Posted by Peter Rudegeair.

Saying ‘yes’ is one of the dominant tropes of American life. America’s favorite politicians are the sunny optimists: think Ronald Reagan and “Morning in America.” In fact, the culture is so insistent on looking on the bright side that, as Barbara Ehrenreich complained in a recent book, injunction can be heard on the cancer ward. You might even say — and some historians have — that Americans themselves have been pre-selected for their optimism: you or your ancestors had to have a powerful faith in the New World and the opportunities here to make the trek over in the first place.

That’s why when I interviewed Nikesh Arora, Google’s head of sales, operations and business development at a media conference last week, one of his comments had particular resonance with the live midtown Manhattan audience and in the blogosphere shortly afterwards. Google, Arora said, works hard to create “a culture of yes.”

Arora described the Google approach as an “inversion” of the attitude in more traditional companies, where “everybody in management is trying to look at where the flaw is when somebody is presenting. Everybody is trying to figure out what’s wrong with their plan.” At the Googleplex, by contrast, “we’re going to say what’s right with it, let’s find a way to say yes.”

According to Arora, creating a culture of yes is central to creating a culture of innovation. As he put it: “the more times you say yes, the more you create a culture of yes, the more likely you’re going to have people innovating and coming up with great ideas. The more you say no, people will absorb that, anticipate that and say, ‘What’s the point of me trying to innovate, management is going to say no anyway’.”

Google’s culture of yes extends to the pay-checks of its employees: a couple of weeks before I interviewed Arora, Google had given all of its 20,000 staff members a $1000 holiday bonus and decreed a company-wide 10 per cent pay raise.

Before the financial crisis, Google’s gung-ho commitment to innovation, and even its $1 bn company-wide retention bonus, would have been perfectly in tune with what I can’t resist calling the national zeitgeist. But what made Arora’s comments so striking this month was their sharp contrast with the mood of America, and even most of the developed world.

Google’s chiefs are striving to build a culture of yes, but most of America is living in a culture of no: banks aren’t lending, businesses aren’t hiring and consumers aren’t spending. That’s true of much of Europe, too: the latest act in the sovereign debt crisis has pushed the continent deeper into its new age of austerity.

That contrast points to one of the deeper consequences of the recession and slow-motion recovery: after two generations of plenty, the developed world has abruptly shifted to a culture of no. That includes even the homeland of the optimists, America. The culture of no is already being reflected in American politics, where the Republican legislative strategy of just saying no has proven spectacularly successful politically.

The two exceptions are the emerging markets — already re-branded fast-developing economies by some of their fans — and the technology sector. These countries, and this industry, remain cultures of an emphatic, even accelerating — remember that 10 per cent pay raise — yes. And even in nations that have been pushed into the no camp, anyone smart and lucky enough to surf the waves of the technology revolution and the rise of the emerging markets is still living in the land of yes. That’s why the New York Times this week announced the return of conspicuous consumption on Wall Street, even as Main Street is experiencing, at best, a prolonged period of slow growth.

We are living in at time of unprecedented international interconnection and access to information. But it is also a moment when different parts of the world, and different groups within societies, are moving at very different speeds. A good way to understand the divide is between the cultures of yes and the cultures of no.

One reason this recession is so tough on the American middle class is that by habit and by inclination, it belongs to the culture of yes. But high unemployment, a stalled housing market and less access to consumer credit has trapped the middle class in the culture of no. That is turning out to be a social and political problem as much as an economic one.

At last Friday’s Wharton Private Equity Partners Distressed Investing Symposium, Chrystia interviewed Mark Gallogly, co-founder and managing principal at Centerbridge Partners, a private equity and credit investment firm with $12 billion in assets under management. Gallogly said finding good opportunities in the distressed sector has become tougher as the “wall of maturities” (the point in time when debt must be refinanced) has been pushed further into the future, thanks to the booming market for corporate debt.

He notes, however, that the wall has been extended mainly for bank notes and senior debt; not for securities that are subordinate on the capital structure, like junior debt. So distressed investors should keep an eye out for situations in which a corporation’s junior debt matures much earlier than its senior debt:

Aside from buoyant bond markets, Gallogly said private equity also faces a challenge of dealing with an abundance of capital at a time when interest rates are reversing their long-term downward trend:

From [the late 1980s] until today interest rates have done nothing but decline. So the question becomes for this industry… over the next, say, twenty or thirty years, what’s the likelihood we’ll have that environment?… The likelihood is very low. The [private-equity] industry has benefited from a two-decade decline in rates. It’s not going to benefit from that going forward.

A member of President Obama’s Economic Recovery Advisory Board, Gallogly has some advice for the White House: the president should postpone fiscal austerity measures in favor of policies that will jumpstart growth in the near term. When asked what he thinks of the charge that the president is anti-business, he said that, like markets, politics faces the challenge of overswinging, and that this criticism was “way overstated.”

Posted by Peter Rudegeair.

Nikesh Arora, Google’s President of Global Sales Operations and Business Development, spoke to Chrystia yesterday at a panel during the Paley Center for Media’s November International Council meeting. Arora explained how Google is able to keep its garage-workshop spirit of innovation even as the company swelled to 20,000 employees. The key, he said, was to establish a “culture of yes” where the default option is for management to approve employees’ new ideas andprojects rather than trying to nitpick and say no. Several of Google’s most recent initiatives, from driverless cars to a new offshore power grid to promote wind power, were the byproduct of this bottom-up process.

In response to Chrystia’s question about whether Facebook’s new e-mail service will steal users away from Google, Arora said the “internet is not a zero-sum game.” He predicted that in five to eight years, 80 to 90 percent of people’s time will be spent on internet-enabled devices, and in such a world, it would be impossible for any one company to dominate all online behavior.  Arora foresaw a future in which there are 15 to 20 players that provide the most popular online services, and that he would include Google and Facebook in that list.

Finally Arora shared his outlook for what areas Google is investing in most heavily.  He said the company’s focus on advertising, while sizable, is aimed only at the 10% of the $600 – $700 billion ad market that is online.  In five to eight years, he predicted 30 to 50 percent of the ad market will shift to online.  Google will be poised to take advantage of that shift, as well as the shift to personalization and interactivity in ads that will occur in the near term.

Posted by Peter Rudegeair.

Surf the web or watch TV and you will probably conclude that American politicians and American pundits don’t agree on much at the moment. But that polarized public discourse obscures the equally important fact that Americans are remarkably united when it comes to determining what the big issues facing the country are.

This isn’t a moment when the nation is divided between isolationists, who want to focus on domestic issues, and expansionists, who want to focus on the rest of the world; nor is this an era when the political debate is about whether social policy—those old standbys like abortion, gay rights and family values—or economic concerns—be they poverty reduction or business growth—should be pre-eminent.

Instead, everyone is pretty much agreed on the big challenges facing America: stimulating economic growth, balancing the budget and finding a place for the United States in the world economy. There is even consensus, at the broadest level, on what the country needs to do to achieve all three: save more and spend less; invest more in social and physical infrastructure and less in personal consumption.

Here’s how Nobel-prize winning economist Michael Spence framed the problem—and the basic solution—when I interviewed him at a recent conference. “Let me describe China thirty years ago,” said Spence, who is advising the Chinese government on the twelfth, and latest, five-year plan. “Thirty years ago China had a per capita income of $400, changed direction, and started saving at 35% and investing at 35%. OK? Now when you have a $400 income and you’re saving at 35%, that means you’re consuming 65% of $400. That is a huge commitment to the future as opposed to the present, right? Now you either make the commitment, as the Chinese did and all the other high-growth developing countries, or you don’t.”

That’s a tough message, but it’s not actually a particularly controversial one. The hard part has been finding a consensus on how to pay for that investment in the future.

No surprise there. ‘Who pays?’, or, as Lenin more forcefully liked to put it, ‘kto kogo’ (‘who whom’) — is a, maybe the, central question politics exists to resolve. What is proving harder for the U.S. to come to terms with is that the battle today is largely a class divide.

Americans are accustomed to framing their political battles around race, region, religion, gender and even sexual orientation. But when it comes to money, the classic dividing line in the politics of so many other nations, Americans get decidedly squeamish. That’s probably because the classless society, or at least one in which wealth depends on achievement rather than birth, is so central to the American idea.

The problem today is that, even if you believe that America is a perfect meritocracy—something the most ardent libertarian is unlikely to assert—you can’t deny that globalization and the technology revolution are enriching the super-elite and hammering everyone else. Unemployment is still hovering close to 10 percent, but CEO compensation, according to a calculation by the Wall Street Journal this week, rose by 3 percent in the latest fiscal year. That continues a thirty year trend, which has seen the top 1 percent rise from taking home 9 percent of the national income in 1976, to 24 percent today.

This yawning class divide—and that is what it is, even if Americans are loathe to call it that—makes investing in the future particularly hard for the country to agree on. Nancy Pelosi’s constituency is too enraged by the gains of the super-elite to consent to cuts to social security or social services.

The super-elite, who regret America’s national economic malaise as a matter of theory, but who are personally doing better than ever, are finding it much easier to back flashy personal philanthropies than to go along with swinging increases in their own tax bills.

Authoritarian regimes, like Communist China, can coerce their people into investing in the future. Democracies need to persuade them. One essential part of that pitch is convincing voters—and taxpayers—that their sacrifice will be shared. In today’s two-speed America, that’s not an argument anyone is yet making.

Back in September Chrystia appeared on a panel for public-interest communications firm Fenton that addressed the state of corporate social responsibility in business today. She elaborated on her August op-ed in the Washington Post that argued that CSR is a “a fetish encouraged by the philanthropies that feed off it and funded by the corporate executives who have found that it serves their bottom line.” Check out the highlights.

You can watch the entire panel here.

Posted by Peter Rudegeair.

This fall, much of the United States seemed to have settled on a narrative for the country’s struggle to adapt, after a debilitating financial crisis, to a post-industrial and post-unipolar global economy: China and its undervalued currency are largely to blame.

Proof that this was a nationally compelling storyline came during the acrimonious midterm election campaign. U.S. politics have rarely been more polarized, but complaining about China was something both parties could agree on.

John Boehner, the presumptive new Republican Speaker of the House, attacked the Democrats for “a stimulus that shipped jobs overseas to China instead of creating jobs here at home.” Harry Reid, the Nevada Democrat who hung on to his Senate seat and his job as Majority Leader, accused his Tea Party opponent Sharron Angle of being “a foreign worker’s best friend” for supporting corporate tax breaks that helped businesses outsource jobs to China and India.

This rare bipartisan consensus is why Americans were astonished to discover, when the Group of 20 gathered in South Korea this week, that in much of the rest of the world, it is the U.S. that is seen as the world’s rogue economic player.

That sentiment erupted with particular intensity in the wake of the Federal Reserve’s decision to pump $600 billion into the economy, a measure emerging market leaders worry will release a flood of money into their countries and which Europeans fear will bring inflation. But the rest of the world’s complaints about the U.S. run deeper than Fed chairman Ben Bernanke’s resort to quantitative easing.

The U.S. criticism of China rests on a fundamental critique of its economic model – an authoritarian system which suppresses domestic demand and artificially lowers the price of its exports. Critics of the United States likewise have begun to articulate a systemic challenge to how the U.S. economy works.

That view is behind the declaration by China’s leading state-backed rating agency that there are “serious defects in the United States development and management model.” Germany has been equally forthright. Finance Minister Wolfgang Schauble told Der Spiegel: “The American growth model is … stuck in a deep crisis.”

The tricky truth is that both perspectives—the “blame China” paradigm, and the “blame America” one—are right. We are at a turning point in the world economy, one comparable to the global grinding of gears around the time of the two world wars. At this complicated and volatile moment, it just so happens that the world’s two most important economic players—the U.S. and China—aren’t fully in sync with everyone else.

Mohamed El-Erian, the CEO of bond giant Pimco, and a former International Monetary Fund economist, described the problem to me thus: “National responsibilities are conflicting with global responsibilities for both the U.S. and China. That is a real problem for the global economy.”

Seen from this perspective, China and the U.S., so often framed as rivals, actually look like twins. Both countries are preoccupied with domestic growth: China sees itself mainly as a poor country that needs to get richer, while the U.S. is grappling with a painfully slow recovery from the financial crisis. But the chosen paths to growth at home in each of these countries – a weak currency and an export-led economy for China; monetary expansion and perhaps a weaker currency for the U.S., too – are unwelcome in much of the rest of the world.

That clash, Mr. El-Erian fears, “will lead to increasingly inward-looking social and political reactions” in many countries. That’s a problem, he thinks, because today’s global economy is designed to be open: “our globalized world is now hardwired to be outward-oriented.”

Poor countries are accustomed to being told by outsiders what they need to do at home if they want to participate in the global economy; in fact, that’s one way you could define the historic role of the IMF. What is different today is that the world’s dominant economy and its rising one are the two countries whose domestic priorities are causing the greatest disruption for the rest of the world.

Small countries are used to accommodating big ones. But big countries are accustomed to setting the rules. Mr. El-Erian believes that “we will be writing about this period as an historic time of fundamental global re-alignment.” A big part of that realignment is figuring out how to balance national needs against global ones, and doing that turns out to be especially hard if you are used to determining the international rules of the game.

Chrystia discusses the Fed’s recent decision to launch a new round of quantitative easing on the PBS NewsHour:

You can read the transcript here.

Posted by Peter Rudegeair.

A favorite theme of American business and political elites at the moment is that authoritarian regimes—i.e., China—may be better at making hard, long-term economic decisions than are querulous democracies—i.e., the United States. There is plenty of academic research to suggest that, over the long term, this view is wrong. But in the shorter term—this week in fact—America itself offered a case study of this scary theory.

Consider: On Tuesday, Americans swung sharply to the right, giving their Democratic President a shellacking and handing control of the House of Representatives to the Republicans. The country’s most powerful elected Republican, John Boehner, who will be the new speaker, immediately declared it was a vote for “cutting spending” and “smaller, less costly government.” Most analysts, including happy ones on Wall Street, who are often most cheerful when the country’s elected officials are least active, decided it was a vote for gridlock, thanks to the Democrats’ continued control of both the Senate and the White House.

Then, on Wednesday, America’s most powerful unelected Republican, Ben Bernanke, the chairman of the Federal Reserve, swooped in with massive government action, announcing a plan to pump $600 billion dollars into the U.S. economy over the next two years. That is not much smaller than two of the big government interventions that earned the Democrats their shellacking—the $700 billion TARP program (never mind the pesky fact that it was actually a Republican Secretary of the Treasury who invented it) and the $787 billion stimulus.

The timing of the Fed’s move underlined one of the most important take-aways from the mid-term election campaign. Watch cable news or surf the web and you are likely to conclude that America is a deeply divided nation, split between fiercely partisan hardliners on the left and on the right. That’s one version of the political battle. But another one is that America is indeed divided, only, in this narrative, the division isn’t between liberals and conservatives, it is between the hoi polloi and the elite.

That split between the mandarins and the public is how you get a popular vote for government inaction the day before the bi-partisan, Republican-led technocrats at the Federal Reserve, with only one dissenting vote, endorse massive government intervention. The economic battle in America today isn’t just between the Republicans and the Democrats, it is between the technocrats and the populists, and in the later contest, the Bush-nominee who runs the Federal Reserve probably has more in common with the beaten up Democratic President than he does with the victorious leaders of his own party.

Of course, this sort of national divide is the main reason central banks are independent: rich western democracies decided some time ago that long-term objectives of monetary policy are best judged by a technocratic elite, not by elected politicians and the sometimes angry constituencies who choose them.

But turning over responsibility for pulling America out of its recession to the unelected chiefs of the Federal Reserve—which is likely to be the big practical result of this week’s vote—is not without some tricky consequences. For one thing, it is clear that America’s central bank would prefer that its monetary stimulus be accompanied by a fiscal one—a measure that seems almost impossible after this week’s vote. That means that the money Washington is pouring into the economy will go first to those who need it least—banks, businesses and families with strong-balance sheets are in the best position to take advantage of the cheap money flooding into America. The unemployed—who figured prominently in the Fed statement and were one of the direct targets of last year’s fiscal stimulus—far much further down the food-chain, as will the Americans grappling with foreclosure.

A second result is that punting the task of economic revival to the Fed may ultimately mean sending the bill to the rest of the world. Printing dollars is one way to make it easier for the American government to solve one of its looming, long-term problems—paying off its massive foreign debt. No one wants to admit to inflation as a policy solution, but that’s what political gridlock and an interventionist Fed could amount to—and that sleepwalking policy is Washington’s real ‘don’t ask, don’t tell’ secret.