From China’s slowdown to the growing pressure on Ukraine, it was a busy year in global economics. What have we learned from the successful fight against inflation in the United States? Is China no longer on pace to become the world’s largest economy? And was artificial intelligence overhyped in 2023?
From China’s slowdown to the growing pressure on Ukraine, it was a busy year in global economics. What have we learned from the successful fight against inflation in the United States? Is China no longer on pace to become the world’s largest economy? And was artificial intelligence overhyped in 2023?
Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
LISTEN HERE: For the entire conversation, and episodes in the weeks ahead on this subject and others, follow Ones and Tooze wherever you get your podcasts.
Cameron Abadi: Inflation rates in the United States have now more or less come down to the levels that central banks have said they’re ready to accept. As someone who has argued inflation is a transitory phenomenon that would largely resolve on its own, do you feel vindicated by how inflation has developed? And moreover, what sort of new economic knowledge have we gained as a result of this entire experience with inflation? Have the prevailing economic models about the trade-offs between inflation and unemployment all been proved wrong or incomplete?
Adam Tooze: I do feel vindicated as a member of Team Transitory in the sense that our leading opponents, let’s call them Team Doom or Team Pain, have clearly been proved wrong. They’ve been proved wrong in the sense that they took the view that inflation could only be squeezed out of the economy with a huge surge in unemployment, and that was the risk that we were running in advocating for fiscal stimulus in 2020, 2021, 2022. Former U.S. Treasury Secretary Larry Summers has closely identified with this position. I think that position has clearly been disproved.
Interpreting what we have ended up with is tricky. The actual outcome, which is a surge in inflation followed by a fall in inflation—not a fall in prices but a fall in inflation—back to relatively moderate rates, has not required a huge surge in unemployment. Unemployment has remained remarkably low, in the 3 percent range. This is, of course, fantastic news. The Team Doom-ers rescue themselves by saying it was their Cassandra warnings that caused the central banks ultimately to stick interest rates up very severely—we’ve spoken about that many times on the show—and that’s what caused inflation to come down. So that’s how Team Doom kind of rescues itself.
Hard-core Team Transitory says: You guys are entirely arguing about the wrong issue. This is essentially a supply shock. It was always a supply shock; that’s what drove prices up. It was always quite limited in its scope. As soon as those effects wore off, prices stabilized, inflation fell, and we’re back to where we started, and really the entire drama around the central bank is a storm in a teacup. And I think that’s where all of the new research needs to be done. We actually need to understand far better how price shocks do work and how they might, for instance, among other things, unleash price-gouging behavior in which firms, for fear of getting left behind by price changes or exploiting the opportunities to make price changes, do so.
And on the other hand, if we actually do want to insist that central bank policy did the work here, we need some better causal mechanisms than the ones we’ve got. Because faced with the kind of inflation shock that we saw, it’s just not entirely obvious how this interest rate increase served to bring this inflation back down again. There’s some evidence of demand repression. The worst case is we haven’t actually seen the full effects of the interest rate increase yet, and we may yet get a harder landing than we currently reckon with. But it’s in making sense of this range of choices where the new research needs to be done.
CA: ChatGPT set off a wider discussion this year about the future of AI in all of our lives. But should we be concluding that there was a bit of overhyping of AI at some point this year? The conversations about artificial intelligence that I encountered at some conferences seemed to veer into a philosophical, almost eschatological territory—what it would mean for AI to put all people out of work? What would it mean to be human in those circumstances? I wonder what it will mean for AI to be kind of transformative in a more normal way. Could this be the kind of technology that improves growth trajectories without kind of fundamentally changing society?
AT: If you do look at the economic estimates of what AI is going to do, I agree there’s a gap between those numbers and the kind of talk of a singularity and some sort of fundamental shift in humanity’s relationship to technology. The Goldman Sachs number is the one that’s most widely cited. In fact, it’s two numbers which I can’t quite square in my head. The more modest of the two is that they think it will add $7 trillion to global GDP over the next 10 years. Now, $7 trillion sounds like an awful lot of money, but when you place it in relation to global GDP, which is about $100 trillion, it’s about 7 percent of current global GDP, which we would expect to expand over time so that 10 years hence it’s substantially less. That would be a fairly modest number. The same report from Goldman Sachs also says it would raise labor productivity growth by 1.5 percentage points per annum. So, as far as I understand, that would pop labor productivity growth in the advanced economies from maybe 1.5 percent to 3 percent per annum. If they mean that, then that’s actually a really dramatic transformation and over the course of 10 years would yield, one would expect, rather higher gains in terms of GDP per capita than the $7 trillion estimate.
It’s probably useful at this point to add from a historical perspective that our entire understanding of industrial revolution, so-called, tends toward the thinking of economist Robert Solow. In other words, we don’t actually think that the 19th-century or even the 18th-century industrial revolutions were kind of cataclysmic, world-changing events in the way that we might imagine from reading the romantic novelists of the early 19th century or Karl Marx, indeed. But it was, in fact, incremental change with rather large change in very small parts of the economy slowly spreading to more moderate change in larger parts of the economy over time—all of which adds up to relatively modest, in absolute terms, changes in overall growth rates, which, if they are continued over ever larger societies over longer periods of time, ultimately yield total transformation. That may be indeed precisely the kind of corrective that we need when faced with the hype around AI.
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CA: China has been a big economic story this year, with slower growth rates there leading to people talking about a potential economic crisis. Is China no longer on pace to surpass the United States as the world’s largest economy? And does that matter to begin with?
AT: I had a bit of an epiphany about this. It is true that if you take market exchange rates—GDP multiplied by whatever the prevailing exchange rate happens to be on any given day—the U.S. economy at $25.5 trillion is larger than that of China at $17.8 trillion. But this is, by any reasonable estimation, a really bad way of measuring GDP because it’s subject to the violent and, many economists believe, essentially inexplicable movements of the exchange rate. And that’s not a very satisfying way of thinking about large-scale international comparison. If you do something that seems on the face of it more sensible, namely trying to create comparable baskets of goods and measuring their prices and doing the comparison that way, well, then China overtook the United States already in 2016 and currently, with a GDP of $30 trillion in purchasing power parity-adjusted dollars, is 20 percent larger than the United States at $25 trillion. So, in that case, if we move away from what is essentially a silly way of measuring and use instead our best, no doubt flawed but probably the only coherent way of making such a measurement, then China already did overtake the United States.
And if you’re having kind of a moment of skepticism, think about it this way: If you want to know how big a modern economy is, one obvious way of measuring whether it’s bigger or smaller is how much energy it consumes. So ponder this: China’s total electricity consumption is twice that of the United States currently. So it would frankly be kind of mind-blowing if China’s economy weren’t larger than that of the United States. Just on that basic metric, it’s pretty clear.
You could say, well, China’s got more heavy industry and so on and so forth, but you’re basically kind of trying to wheedle out of the inescapable conclusion that as a physical, productive system, China’s economy at this point is not just a little bit bigger but really very substantially larger than that of the United States. It’s unsurprising because it sustains 1.4 billion people at a very considerable standard of living in the richest parts right now, and the majority of them are at a moderate standard of living. And that’s an awful lot more people than live in the United States, obviously. So we should maybe just give up on this question. At some level, this waiting for China to overtake misses the point. And it misses the point that what really will matter for power is technological capacity, physical production capacity, to satisfy basic needs of the population. And, on all of those metrics, China’s aggregate effort and capacity are clearly at this point larger than those of the United States.
CA: Russia has really shown how its advantage as an economic power can be translated into destructive force for long stretches of time in Ukraine. I wanted to ask you about what we’ve learned about being the smaller party in such a conflict. Is Ukraine inevitably dependent on outside assistance to maintain any hope of a more normal future? Is that inherently a disadvantaged position to be in such a conflict? And how does all that affect its military planning and political prospects in the future?
AT: I think this is a fascinating question. What’s really striking in the Ukraine conflict—which is in some senses a relatively classic, large-scale, great-power war—is not just the question of underlying structures but how they’re being mobilized. And I think that’s going to come ever more to the fore because neither Ukraine nor Russia is fighting this war at full tilt, not by World War II standards—not Ukraine, certainly not Russia, which is spending 6 to 7 percent of GDP on its war effort. This is Vietnam level of effort. So the crucial thing is the bits of the economy that matter for the war most, which is the military-industrial complex—how quickly can you mobilize them? And then there are questions of the underlying structure of these societies and how that is then reflected in the rather specific mobilization capacity of their military-industrial sectors. And there’s a really stark difference here. Russia is just operating in dimensions and at a pace and on a scale that much, much, much richer, much more sophisticated societies in the West backing Ukraine are failing to match. And that will in the end be all that matters.
My sense about what we’ve learned over the last 18 months initially was a kind of humbling realization that macroeconomics didn’t tell us very much about the resilience of Ukraine, which was far more resilient than the macroeconomic numbers would suggest. You could say we may be learning something similar about Russia, which is that it certainly isn’t proving vulnerable to the sort of economic pressure the West is willing to apply, which is anything but all out. But it’s not enough to even slow the Russian economy down very much right now. It’s been a humbling kind of lesson.
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