Korean Reunification: High Hopes and Higher Hurdles


Summary

On April 27, Kim Jong Un stepped over the military demarcation line at the Demilitarized Zone, becoming the first North Korean leader to set foot in South Korea since the war. Kim and his South Korean counterpart, Moon Jae-in, then joined hands and briefly crossed back into North Korea. Their subsequent summit was the first between leaders of the North and South in more than a decade and only the third ever. Historic symbolism aside, this is familiar territory for Korea. Since 1972, on both sides of the 38th parallel, reunification has officially been portrayed as a matter of when, not if. And occasionally, peace initiatives have edged beyond mere rhetoric, leading to vague plans to establish some sort of loose confederation between the two.
But the overriding reality is that the two sides would have to defy myriad more immediate concerns and interests to achieve reunification. As a result, various peace initiatives have routinely devolved into disingenuous ploys (particularly by the North) to ease international pressure, please domestic constituencies, exact material concessions and vie for advantage in a 70-year zero-sum fight for peninsular supremacy. And there’s ample reason to doubt the North’s sincerity again. In all likelihood, Kim’s outreach this year is in pursuit of some combination of staving off a war with the Americans, driving a wedge between the U.S. and South Korea, easing sanctions pressure and stalling for time to overcome technical hurdles to the development of a reliable long-range nuclear deterrent. Already, the North is for all intents and purposes a nuclear power, and it’s keen to see how this power translates into diplomatic leverage, as well as to demonstrate that it can be trusted to act rationally with the bomb.
Still, the dogged optimism from both sides isn’t empty gesturing. However strong the forces keeping them apart, both sides have a geopolitical imperative to reunify. As it stands, Korea is vulnerable to much stronger powers on its periphery (and ones that have historically used the peninsula as a steppingstone to attack each other), overly dependent on fickle allies, economically stunted and too fixated on the threats from across the DMZ to throw much weight around abroad. As one, they would become one of East Asia’s strongest military powers and obtain a freedom of action that hasn’t been seen on the peninsula in centuries. This has been true since the Korean War, but regional changes – most important, a rising China and a remilitarizing Japan – are only heightening this imperative.
Countries never fully achieve their geopolitical imperatives – the requirements of securing a nation in all its dimensions. But neither can they ever be fully ignored. Over time, whether or not they are acknowledged by those in power, imperatives remain the core of any country’s national strategy, surviving the fickle currents of more immediate geopolitical concerns that can dominate a state’s short-term decision-making. Thus, the two Koreas will continue to try to reconcile, even if the failures pile up. The more sincere this pursuit, the more dramatic the implications for the East Asian geopolitical landscape.
This Deep Dive examines the complicated reality of Korea’s unification dream. For the sake of better understanding what Seoul and Pyongyang have in mind as they try to build on their nascent detente, it focuses solely on the scenario of peaceful, negotiated reunification – not one involving the implosion of the North Korean regime, nor a collapse brought about by a U.S.-led military operation, nor a forceful takeover by either side. It concludes that although a largely symbolic confederation may be achievable, the odds are stacked against a truly meaningful reunification – that which Korea’s imperatives dictate it must pursue to be substantially better equipped to deal with the challenges rising outside the península.

Why It Must Happen
For as much as Seoul and Pyongyang are fixated on the threat they pose to each other, historically, the threats to Korea have come from outside powers. The Korean Peninsula juts southward from Manchuria and eastern Russia, with the Yellow Sea to its west and the Sea of Japan to its east. Thus, historically, the peninsula has posed a potential threat to three major powers, regardless of the intentions of its government.

Korea has always been a critical piece in any Chinese or Japanese strategy as a result. From the Chinese point of view, Korea served as Japan’s onramp to mainland Asia. When the peninsula was in Japanese hands, Manchuria and the Russian maritime regions, including Vladivostok, were threatened. From Tokyo’s perspective, if a hostile power were to hold Korea and thereby gain access to the Sea of Japan, it could threaten maritime trade and open the door to invasions of the home islands from the west and east. The result is that the peninsula has been invaded repeatedly – by the Mongols, Manchus, Chinese and Japanese, as well as by the Soviet Union at the end of World War II and the United States in 1950. These invasions were driven primarily by the peninsula’s value in attacking or blocking major powers.
 

Still today, Koreans see the peninsula as “a minnow among whales” – and the whales are getting hungry. China is flexing its newfound might, both military and economic, and pushing to reshape the region. Japan, which occupied Korea from 1910 until its defeat in World War II, is gradually remilitarizing and coming to terms with its need to take more responsibility for its own geopolitical imperatives. And the continued division of the peninsula is keeping it weak. The North is still looking for its economic footing following the loss of its core benefactor, the Soviet Union, whose collapse left Pyongyang overly dependent on Beijing and perpetually at risk of coercion. It has demonstrated an extraordinary talent for regime preservation during a period marked by famine and extreme poverty, but it nonetheless is perpetually at risk of major internal destabilization. The South’s concomitant surge of prosperity has only heightened this risk, while making forced reunification by the North increasingly a pipe dream.
The South, meanwhile, is again feeling the claustrophobic constraints of its alliance with the U.S., which has proved itself a fickle friend. The U.S. has mulled withdrawing from the peninsula repeatedly since the late 1970s, including reportedly during the Trump administration, which also happens to be contemplating a war against the North that would put the South at risk of devastation by North Korean conventional armaments. This can’t be ruled out, despite Seoul’s success so far in talking the Americans down. Even if the U.S. holds its fire, Seoul has ample reason to believe Washington won’t subsume U.S. interests to the South’s in a crisis. Seoul does not want to find itself in this position again.
 

A unified Korea would eventually be much more powerful, by most metrics, and in much better position to shape its own destiny and put an end to its legacy of foreign subjugation. Today, the two sides have 1.75 million troops, which if combined would be the world’s fourth-largest army. (Presumably, both sides would be able to scale down their forces dramatically, but they have demonstrated the capacity for an incredibly powerful military.) It would no longer have to devote an inordinate amount of resources to defending the DMZ and could reorient its force posture to external defense. It could conceivably emerge as a nuclear power. The U.S. would likely lose interest in military action, and thus lose the cause for keeping U.S. forces on the peninsula. China, Japan and Russia would face an ascendant and increasingly outward-focused neighbor. Over time (despite staggering initial costs), reunification could also dramatically boost the peninsula’s economic heft, with North Korean minerals and cheap labor flowing south, and South Korean technology, capital and food flowing north.
 
Why It Won’t Happen Quickly, If At All
It has made geopolitical sense since their establishment in 1948 for the two Koreas to find a way to get along and tap into their joint potential, and yet they haven’t, because peaceful reunification is exceedingly difficult to achieve. The North and South have fundamentally diametric economic and political systems and national ideologies.

They also have very large guns pointed at each other’s head. Neither side has much reason to trust the other to refrain from trying to exploit the chaos that would come with a transition and force reunification on their own terms. This trust gap is not going away, nor is the prisoner’s dilemma. True reunification would require breathtaking courage from leaders on both sides, who would need to ignore immediate incentives and assume enormous risk while going through the process.
This is, in part, why only two modern states have achieved negotiated, peaceful reunification. One was Yemen in 1990, and its experience ever since has been nothing anyone wants to replicate. The more instructive comparison is Germany, which reunified the same year. Prior to being sliced in two by outside powers, both Germany and Korea were cohesive cultural, linguistic and ethnic entities. Yet both became locked in a protracted zero-sum contest for supremacy between their competing halves. Both are surrounded by countries that, through the long-term lens of their own geopolitical imperatives, would rather see them stay divided. Both had U.S. troops stationed on half their home soil. And like the North, East Germany suffered greatly from the loss of Soviet aid and security.
In most ways, though, the two Germanys were much better suited for reunification.

By 1991, they were far more integrated than the Koreas are today, and the East was already beginning to disintegrate. East Germany had never adopted North Korea’s extreme version of totalitarianism and collectivism, and it didn’t derive its legitimacy from as intense a narrative of permanent siege by outside forces. The economic disparities between the two Koreas are also far wider. By 1991, West Germans were two to three times as wealthy as their eastern brethren, while South Koreans are estimated to be between 12 and 40 times richer than North Koreans (the North’s opacity explains the wide range in estimates). Thus, reunification was considerably less taxing for the West than it would be for the South, which likely wouldn’t enjoy the same level of outside funding for the process that the West Germans did. Despite their age-old suspicion of a united Germany, neighboring powers like France and the United Kingdom accepted reunification in service of the broader project of European integration, with NATO and the common market diminishing the threat of German domination of the Continent. None of Korea’s neighbors have a similar cause to tolerate a process that puts a more powerful state on their doorstep.
 

North Korea, despite its poverty, has already proved capable of surviving without Soviet support. And though Pyongyang does not want to be beholden to Chinese patronage, this lifeline isn’t going to dry up anytime soon, given China’s ascendancy and interest in retaining the North as a buffer state. As a result, North Korea is more likely to be able to hold out on reunification if it doesn’t like the terms. By comparison, West Germany and its allies were able to gradually entice the East Germans away from the wheezing USSR, which couldn’t afford to keep up heavy subsidies to its client states anyway. For all intents and purposes, West Germany absorbed East Germany. North Korea won’t willingly follow suit. And unlike East Germany, North Korea has nukes.
In short, there’s no template for the Koreas to follow. With so many unknowns and risks, Seoul and Pyongyang would have to start with some sort of loose confederation that enabled both sides to maintain their existing political and economic systems. (In fact, the first inter-Korean summit was intended to be held in the mid-1990s to discuss steps toward a confederation, but the death of North Korean founder Kim Il Sung in 1994 derailed the process and delayed the summit for another six years.) This structure could help weaken distrust between the two while creating mutual economic dependencies that raise the cost of abandoning the reunification process. But the path of least resistance is to delay decisions on the thorniest issues – and to date, most reunification plans made public, invariably short on details, could be best characterized as doing exactly that. And the path of least resistance won’t serve Korea’s imperatives. For a Korean confederation to be much more than a symbolic arrangement, the two sides would have to take on an inevitably messy and protracted process, vulnerable to innumerable political, economic and security-related headwinds.
 
The Problem of Two Militaries
The riskiest and most complicated challenge to meaningful reunification would be permanently backing off war footing and, eventually, merging the two militaries. This is also the most important step for the Koreas to be more than discrete countries in everything but name. If the goal is to become a unified power capable of executing a common strategy and keeping regional challengers at bay, Korea simply can’t have divided forces and parallel command structures that distrust each other. A de facto military alliance wouldn’t be enough, since any such arrangement would be fragile at best, beset with mutual suspicion and ripe for external exploitation. In that scenario, the two sides would have to continue to devote the bulk of their resources to deterring each other.
Eventually, the two sides would have to demilitarize the border, eject the Americans and find a way to lessen the threat they pose to each other without mutually disarming or demobilizing (a common step in many peace processes), since a unified Korea would still need a robust military. There is no easy way to do this that wouldn’t make one side vulnerable to an attempt by the other to break the detente and try to impose reunification on its own terms – and neither side is likely to weaken itself substantially as a show of good faith. In other words, for the North, pulling back its artillery from within range of Seoul would eliminate its biggest deterrent against aggression. For the time being, at least, the same limit applies to the departure of U.S. forces. Even if they could achieve these initial steps, both sides would still have the firepower to rain considerable pain on the other. The South’s capacity to conduct a decapitation strike against the Kim regime will never be abandoned, for example. Meanwhile, there’s still the thorny issue of the North’s nuclear stockpile.
To ease suspicions and create enough mutual incentives to keep momentum going toward reunification, a joint force would need to be established. This would also be needed to address the nuclear issue, assuming the North doesn’t just hand its nukes over to Trump when they meet – and assuming the South would be willing to incur the diplomatic and economic costs of going nuclear. These steps would face their own complications, from reluctance to hand over military secrets, to heightened coup risks, to crippling bureaucratic turf battles that would erode the readiness of the joint force. Again, there would be enormous incentives to cheat. Moreover, merging the military without merging the government would be problematic to say the least and would make it nearly impossible to craft or execute a common strategy. There is some precedent for effective joint command structures serving different governments. Washington and Seoul share command of the South Korean military, for example, but this was never intended to be a permanent solution, and either side could go it alone if it so choose.
 
The Problem of Politics
More than anything, the North Korean regime is hellbent on survival. This is why it wants nukes, and it’s why it remains so closed off to the world. And though reunification would certainly be a major economic boon in the North, potentially lessening agitation among the impoverished masses, it would threaten the regime’s grip on power in other ways.
The regime has survived war, famine and the loss of external support by sustaining an Orwellian reign of terror, putting the country on permanent war footing and conditioning the public to believe that the Kim dynasty is the only thing keeping the North from annihilation by outsiders (who are to blame for its internal woes). Entering into a union with the South, particularly if U.S. forces departed, would dramatically undercut Pyongyang’s siege narrative and cast doubt on whether the North Korean system was still necessary. Opening the economy to outside forces would spark a scramble for wealth among North Korean elites and allow competing power centers to proliferate. Meanwhile, the small steps that could be achieved with even a loose, mostly symbolic confederation – more joint exchanges, looser travel restrictions across the DMZ, expanded joint economic ventures and so forth – would expose more North Koreans to the South’s prosperity and discredit the regime by putting its economic track record in an exceedingly harsh light. Most risky for the North, bilateral military cooperation would weaken solidarity among the North’s forces, threatening the Kim dynasty from within.
East Germany intended to carefully control the reunification process once it tore down the Berlin Wall and other parts of the Iron Curtain in 1989. But things quickly took on a life of their own. East Germans (and the East German capital) headed west in droves, and within a year the government in East Berlin collapsed. Pyongyang cannot deliver the full benefits of reunification to the North and preserve its total authority. However tightly it may think it can manage the process, things are liable to get quickly out of hand.
In the South, meanwhile, public interest in reunification has declined over time as the costs of the process have become more apparent. Economically, despite the potential for massive long-term gains, reunification would be exceedingly problematic initially, with the South effectively forced to subsidize the North for decades even in a scenario that doesn’t result in regime collapse and, say, a southward flood of refugees. To prevent the disparities from sowing social chaos in the North, and to create a prosperous Korea capable of standing as one, northern institutions would need to be rebuilt from the ground up, northern industries subsidized and social safety nets extended across the 38th parallel. Total cost estimates vary widely, but even conservative ones exceed $1 trillion. (West Germany is estimated to have spent about twice that figure. Still today, Germans pay a “solidarity surcharge” tax of up to 5.5 percent to fund reunification.)
 
This reality has weighed on even the most dovish governments in Seoul, such as those in the 1990s led by Moon’s liberal mentors, former Presidents Kim Dae-jung and Roh Moo-hyun. Their “Sunshine Policy” of unconditional engagement with Pyongyang called for an “extended soft landing,” deeming immediate reunification impractical and instead focusing on preparing future generations for the process. In other words, it too kicked the can down the road. At the time, the rocky transition in Germany had served as something of a wake-up call in South Korea for how any transition is likely to defy the two governments’ best-laid plans. Since then, memories of what was lost with the division of Korea have faded only further, while younger generations of South Koreans have grown up amid remarkable prosperity, forced to pay attention to the North only when it lashes out. (This is, in part, why successive governments in Seoul have worked so hard to cultivate the narrative that Korean reunification is Korea’s glorious destiny.)
Meaningful reunification would take decades, meaning it would be warped by numerous campaign seasons in the South (and, potentially, the extraordinary uncertainty that would come with the passing of Kim Jong Un). Political resistance would become more pronounced if and when things got messy.
 
The Problem of Outside Powers
The country with the most at stake in Korea is China. Pyongyang isn’t as useful an ally to Beijing as it once was, and China would benefit from being able to expand its infrastructure and business networks across the peninsula, uninterrupted by the DMZ. More important, it may be able to stomach reunification if it meant an end to the U.S.-South Korea alliance.
Nonetheless, it prefers to have a weak and somewhat dependent neighbor over a larger, more powerful one, and the North’s survival as an independent state – with a substantial military and regime hostile to the U.S. and South Korea – remains important to protect China’s periphery. Beijing certainly cannot tolerate the unlikely but not wholly impossible scenario that unification returns U.S. forces to the Yalu River, and it would face a destabilizing flood of refugees if reunification spun out of control. Moreover, the North has proved useful in deflecting the United States’ attention and increasing U.S. dependence on China’s unmatched ability to manage Pyongyang. From this perspective, China wants to preserve North Korea exactly as it is. So regardless of how strange and unpredictable North Korea is, the Chinese will do what they can to prevent Korean reunification and maintain the current character of the regime.
Japan, meanwhile, benefits from the division of the Korean Peninsula to the extent that it keeps both the North and the South weak and focused largely on each other. Japan could also conceivably benefit from a strong, reunified Korea so long as the new state remained committed to the U.S.-led alliance structure, thus potentially serving as a substantial check on China.
What Japan cannot tolerate is a belligerent reunified Korean Peninsula that gets pulled firmly into China’s orbit, however unlikely this may be. Given its location offshore and its ability to threaten Korea’s export lanes, Japan would be a greater security threat to Korea than vice versa. This, combined with Korean memories of centuries of Japanese imperialism on the peninsula, means Tokyo can’t be sure that a united Korea would be friendly. If the U.S. remains committed to a trilateral security architecture in Northeast Asia, however, it would likely deter Japan’s least-favored outcome. Japan won’t always be so ill-equipped to shape regional events in its favor. But now, it’s left hoping that the U.S. will shape them on its behalf.
The U.S. certainly could do so – and make any discussion of peaceful reunification moot – by launching a war against the North. Its foremost strategic imperative on the peninsula is to prevent the proliferation of nuclear weapons, so its support for reunification would depend first on whether denuclearization actually could be achieved. Beyond nonproliferation, the United States’ prime concern is maintaining a regional balance of power, and South Korea is an important check on Chinese power.
Given its position in Japan, the U.S. could tolerate a withdrawal of U.S. forces from the peninsula, so long as it didn’t put Seoul at risk. It could tolerate reunification, depending on its form: a strong and united Korea threatens the U.S. only if it has nukes and the ability to strike U.S. shores. But like Japan, the U.S. doesn’t want to risk a northern-dominated Korea that falls firmly into the Chinese orbit, even if a unified Korea strong enough to stand on its own makes this scenario somewhat unlikely.
Today, as historically, the fate of the Korean Peninsula is not only Seoul and Pyongyang’s to determine. None of the outside powers with a major interest in Korean affairs have an outright veto on reunification, but one could imagine many ways in which they could try to shape the process in their favor, if not try to thwart it outright if it moved in a direction that hurts their own interests. But then again, this is why the Koreas have an imperative to unite in the first place, however chaotic and destabilizing it may be to try.


Technology can tackle investors’ flaws

Forget about beating the market



TECHNOLOGY has transformed finance. Consumers bank and buy their insurance policies online.

They use technology to manage their pensions and other investment portfolios. But can tech improve returns? Only if it is used wisely.

If it is cheaper to trade, then costs will take a smaller chunk out of long-term returns.

Technology also allows fund managers to replicate stockmarket indices, giving investors access to broadly diversified equity portfolios for a fraction of a percentage point in annual fees.

But the ease and cheapness of trading, along with the vast range of options available, create a terrible temptation. Worldwide there are nearly 7,400 exchange-traded funds (ETFs) and related products.

These funds are not used only by “buy and hold” investors. Nearly half of the top 20 traded securities on American markets, by value, are ETFs.

Just because you can trade does not mean you should. And just because there is a fund specialising in smaller Vietnamese companies, or one that bets on trends in volatility, does not mean you have to buy it. Men aged over 50 can go shirtless on sunny days or wear flip-flops. But that does not mean it is wise for them to do so.

Some professional investors make a virtue of incessant trading, with a holding period for shares of milliseconds rather than years. They can use computers to crunch data faster than anyone else and to exploit small differences in securities prices. This is a Darwinian business, in which everyone is incessantly improving their infrastructure and their algorithms to get an edge on the competition.

But by definition a majority of investors cannot beat the market, whether with frequent trading or any other strategy. Instead of chasing this chimera, ordinary investors should use technology to correct for their innate flaws.

First of all, many people underestimate how much they need to save to meet their long-term needs. Some of this is down to the difficulties involved in the calculations, which require people to make assumptions about longevity, inflation and future investment returns. Another problem is the natural human inclination to spend money today rather than to save for a distant, and uncertain, future.

Either way, such short-sightedness creates a problem. Take Americans aged between 40 and 55.

The median balance in their private pension plans is just $14,500. Low interest rates were adopted by central banks in the aftermath of the financial crisis in order to discourage people from saving, and to help revive the global economy. The paradox is that low interest rates mean that savers need a bigger pension pot on retirement. They must save more, not less.

Technology can help deal with this issue. A good statistical model can tell individuals what pension pot they will need at retirement; what investment return they can reasonably expect; and whether they are on track for the target. If they find they are falling short of their goal, investors can save more or adjust their planned retirement date. Just being aware of the scale of the task can make investors change their behaviour.

Secondly, technology can help investors choose a strategy that avoids incessant trading. It is easy for investors to fall into one of two traps: making an arbitrary selection of assets in their 20s and never changing it, or relentlessly fiddling with their portfolio. Too many people fall into the trap of enthusing over fashionable sectors or hot mutual funds. If a sector is in vogue, it has already risen in price, so it is quite likely to be expensive relative to its history. By the same token mutual funds become hot because of their past performance, but there is very little evidence of persistence in returns.

An automated system can impose discipline. One possible approach would involve setting up a strategic asset allocation: say 20% to domestic equities, 40% to international shares, 20% to inflation-linked bonds and 20% to corporate debt. The portfolio could be automatically rebalanced once a year, or if the asset allocation strayed a long way from the target in the meantime. Such an approach would have the merit of buying assets when they have fallen in price (and are cheap) and selling them when they are dear.

In short, investors should not treat technology as the equivalent of a “diet pill” that will help them to lose weight effortlessly and instantly. Instead, they should view it as a tool to encourage the behaviour (the investment equivalent of exercising more and eating less) that will lead to long-term success. Think of fintech as one of those step-counting apps, nagging you to financial fitness.


A Time for Big Economic Ideas

By David Leonhardt


The headlines may talk about growth, but we are living in a dark economic era. For most families, income and wealth have stagnated in recent decades, barely keeping pace with inflation. Nearly all the bounty of the economy’s growth has flowed to the affluent.

And if you somehow doubt the economic data, it’s worth looking at the many other alarming signs. “Deaths of despair” have surged. For Americans without a bachelor’s degree, one social indicator after another — obesity, family structure, life expectancy — has deteriorated.

There has been no period since the Great Depression with this sort of stagnation. It is the defining problem of our age, the one that aggravates every other problem. It has made people anxious and angry. It has served as kindling for bigotry. It is undermining America’s vaunted optimism. 

So what are we going to do about it?

The usual answers — technocratic changes to the tax code and safety net — are not good enough. They don’t measure up to the problem: an economy that no longer delivers a consistently rising standard of living. They also aren’t very inspiring. In 2016, Hillary Clinton offered many thoughtful proposals, precisely none of which she got to implement.



Teachers rallied at the state capitol in Oklahoma City, Okla., earlier this month for higher salaries and better school funding.CreditJ Pat Carter/Agence France-Presse — Getty Images


This is a time for big ideas. One of the Trump presidency’s only silver linings is its proof that our political discourse had been too narrow. Frustrated Americans don’t feel bound by old rules. Almost 63 million of them voted for a man who had no political experience and made a mockery of politics as usual.

“Donald Trump’s victory implies that people need to be more bold,” as Ro Khanna, a Democratic congressman, has said. “People yawned at the smallness of American politics, at the stagnation of American politics, at the same faces, the same ideas, the same talking points.” Or as Neera Tanden, who runs the Center for American Progress, a progressive think tank, says, “Donald Trump has widened the aperture for policy discussions in the United States.”

Some observers remain confused about all of this. They imagine American politics as a simple two-dimensional spectrum on which Democrats must move to the center. But every issue isn’t the same. Yes, there are cultural issues, like abortion and guns, on which the country is classically divided. On these, moving to the center, or at least respectfully acknowledging our differences, can help Democrats. Representative Conor Lamb recently showed how to do it in Pennsylvania.

Economic policy is different. Most voters don’t share the centrist preferences of Washington’s comfortable pundit class. Most voters want to raise taxes on the rich and corporations. They favor generous Medicare and Social Security, expanded Medicaid, more financial aid for college, a higher minimum wage and a bigger government role in job creation. Remember, Trump won the Republican nomination as a populist. A clear majority of Americans wants the government to respond aggressively to our economic problems.

I think they’re right about that, too. Lawrence Summers, the former Treasury secretary, has a nice framing. He says that the late 1960s and the 1970s should have moved a reasonable person to the right on economic policy, in response to rampant inflation, rising crime, sky-high top tax rates and breakdowns in Europe. The last 15 years — with “widening inequality, financial crisis, zero interest rates, rising gaps in life expectancy and opportunity,” as Summers notes — should move that same person to the left. Different eras require different solutions.
Fortunately, policy experts have begun working on those solutions. One possibility is a federal jobs program, putting people to work earning $15 an hour on vital projects like infrastructure and child care. Senator Kirsten Gillibrand, who seems to be eyeing a presidential run, favors an ambitious version called a federal jobs guarantee.

Another option is a strong response to growing corporate power and consolidation. The Open Markets Institute and Roosevelt Institute have sketched out new antimonopoly policies. Other economists are talking about something called wage boards, where companies and workers would negotiate over industrywide pay. Such boards already exist in New York, California and Australia.

On health care, there are proposals to open Medicare to people younger than 65 (which could also reduce health spending). On child poverty, two senators have proposed a $3,600-a-year annual allowance for children under 6. On education, states and cities have created free pre-K or community college. And to help pay for it all, experts are studying how best to raise taxes on the wealthy — who can certainly afford to pay more.

The details will be important. Done wrong, any of these ideas could fizzle. They could make people lose even more faith in government. Done right, though, the ideas could mimic the grand successes of government: Social Security, Medicare, the military, the Securities and Exchange Commission, the highway system, public universities, medical research and a Defense Department project that became the internet.

It’s time to dream big again.


Regulating Facebook merely nips at the edge of a bigger problem

Consumers are under surveillance in ways we have just begun to grapple with

Rana Foroohar



Quickly conceived conventional wisdom is a terrible side-effect of the age of high-speed media. Storylines develop rapidly, as news organisations chase the most clickable themes. Subtlety and nuance about complex issues are the casualties.

Take, for example, the rash of recent pieces about how, in the wake of Mark Zuckerberg’s five-hour tech support call with Congress, Washington is finally going to get serious about curbing the big tech companies known collectively as Faangs: Facebook, Amazon, Apple, Netflix and Google. “Regulation is coming,” scream the headlines. “The Faangs are finished.”

As the Financial Times’ San Francisco-based Richard Waters points out, the correction in some Faang stock prices will not stop these companies from growing. Meanwhile, most of the regulatory “fixes” being discussed merely nip at the edges of a massive problem.

It is good that US politicians are trying to make social media platforms disclose the sources of political advertising and take responsibility for sex trafficking online. But does anyone really believe that slapping a few moderate regulations — ones that other businesses already have to deal with — on Facebook is going to solve the economic, political and social problems being caused by Big Tech?

Europe’s General Data Protection Regulation goes much further on privacy, of course. But that is just the tip of the iceberg. The big tech companies exacerbate problems — from monopoly power to the need for a new tax and education system to declining faith in liberal democracy — that are not just technical. They are existential.

In an ideal world, the structural shift from a tangible to an intangible economy would trigger deep thinking about digital property rights, trade regulations, civil liberties and so on. Policymakers would have robust conversations with experts from a broad range of disciplines about what the new framework for growth in the digital economy should look like.

We do not live in that world. I worry that public anger engendered by the big tech companies, coupled with the desire of some politicians to score quick points, may well lead us into the sort of regulatory paradigm we saw in the financial sector post-2008.

Lobbyists and vested interests on both sides of the political aisle came up with a complex stew of new laws. Some were good, some bad. The sheer complexity created plenty of loopholes for corporate lawyers to jump through. While risk-taking was curbed at some individual institutions, the system as a whole is no safer. We lost sight of the only question that mattered: how can we create a financial sector that serves the real economy?

We need to ask the same question now about the digital sector. Whatever regulators choose to do to the Faangs themselves, the “data horse” has already bolted. Data have become the most valuable commodity in the world and, as such, companies of every stripe have joined the big tech groups in collecting it. Athletic brands are putting chips in our running shoes that can track where and how we jog. Goodyear embeds sensors in tyres that can beam information about drivers’ performance back to their fleet headquarters. Tractor company Deere & Co recently paid more than $300m for Blue River Tech-nologies, a California start-up that uses deep machine learning to automate farm work. Algorithms stuffed with millions of pictures of cabbages can figure out which ones to spray with fertiliser and which to blast with herbicide.

Companies in every industry are counting on artificial intelligence to drive growth over the next several years. A McKinsey Global Institute report estimates that AI deployable now could create between $3.5tn and $5.8tn annually in value for companies, with the biggest potential gains in areas such as sales and supply chain management. Anecdotally, many companies I have spoken to say machine learning is increasing their return on investment by anywhere from 10 to 30 per cent.

But AI depends on data — the more of it you can stuff into the algorithms, the smarter they become. That means both people and products are under surveillance in ways we have only just begun to grapple with, and not just by the Faangs.

In Hawaii, the state tourism board has worked with online travel group Expedia to use facial recognition software to monitor travellers’ expressions. Users who opt in are monitored via computer webcams as they watch advertising for various kinds of vacations, and then given personalised offers.

In Europe, such tactics may require disclosure. GDPR rules stipulate that citizens have the right, for example, to an explanation for some decisions that are made by machines. That is a smart idea in principle, as algorithms are only as good as the people who are programming them. And yet, EU-style data laws may lead to a trade-off between privacy and economic competitiveness when data are the new oil.

We do not yet know the right balance. But two days of Congressional hearings starring Mr Zuckerberg, chief executive of Facebook, have not helped us to come up with the answers. We need to take the time to grapple with the seismic shifts being wreaked by the digital economy in a deep and real way.


Buttonwood

A Victorian survivor

A tale of cats, Christie and copious chaps



WHEN the Foreign & Colonial Government Trust was launched in 1868, The Economist had its doubts. “The shape is very peculiar,” we worried, adding that “the exact idea upon which it starts has never been used before.” Some of the trust’s promises were “far too sanguine to ever be performed”. Nevertheless, we concluded that: “In our judgment, the idea is very good.”

That turned out to be one of this newspaper’s more successful forecasts. One hundred and fifty years later, the trust is still going strong, having delivered a compound annual return of 8.1%.

It now looks after a portfolio of £4bn ($5.7bn), rather than the £588,300 it raised at launch.

In its own way, the trust is an example of how much the financial sector has changed—and how much it has stayed the same. The idea of a pooled portfolio seems commonplace now, but at the time it was revolutionary.

This was the 19th century, when Britain was confident of its worldwide role. The first portfolio comprised 18 overseas bonds, some in markets, such as Argentina and Peru, not ruled by Britain (the foreign element) and some that were, such as New South Wales and Nova Scotia (the colonial). This diversity allowed the trust to offer an initial dividend yield of 6%; not bad given that the prevailing yield on British government bonds was 3.3%.

The 20th century saw not just the decline of empires but the rise of inflation, which made a bond portfolio hazardous to investors’ health. The fund moved into equities in the 1920s; its first holding was in Shell, the oil giant, and the shares are still in the portfolio today. A century after its formation, the fund was almost entirely invested in equities.

The most recent shift has been into private equity, with the hope that a long-term focus can deliver superior returns. The approach is more systematic than the fund’s occasional forays into unquoted investments in the past. A stake in a musical, “Cats”, bought in the 1970s, is still paying royalties today.

If the portfolio has changed hugely, one feature of the fund has stayed the same. It is an investment trust, or closed-end fund. Unlike a mutual fund, assets under management do not rise and fall in line with customer demand. Shares can be bought and sold only on a quoted exchange.

At times this structure has been unfashionable. In the 1970s and early 1980s the trust’s share price traded at a big discount to its asset value. Other trusts succumbed to takeovers and the sector seemed doomed to disappear. F&C was the first trust to introduce a savings scheme and the first to advertise in the press, and it gradually lured back private investors. The discount is now a modest 2%.

The investment-trust format has also given managers flexibility, as in the aftermath of the crash of 1987, when the fund was able to borrow money to buy shares on the cheap. Neither mutual funds nor the trendy modern alternative of exchange-traded funds (ETFs) can do this.

F&C has also favoured continuity. Between 1969 and 2014, just two managers (Michael Hart and Jeremy Tigue) were in overall charge of the fund. That must have allowed them to take a long-term view. Another incident in the fund’s history illustrates the theme. The only time the trust’s offices were raided by police was in 1926. They were looking for evidence about the disappearance of Agatha Christie, the crime novelist. Her husband at the time, Archibald, was a fund manager for the group. Mrs Christie turned up safe and well in a Harrogate hotel. Her soon-to-be ex-husband remained an F&C director until his death in 1962. Even at that date the group had on its staff one person who had served in the Boer War and another who had fought in the Battle of Omdurman of 1898.

Less happily, this sense of tradition meant the trust was an old boys’ club. The first female director was not appointed until 1988, 120 years after its foundation. And the group is only now dropping the word “colonial” from its company name, and adopting the shorter F&C. That should have been done long ago.

After 150 years the trust is now one of the better adverts for active management. It has beaten its benchmark over the past five years and increased its dividend for a remarkable 47 straight years. It has a modest annual fee of 0.37%.

There is another way in which things have changed, yet stayed the same. Given current high valuations, an equity portfolio will not deliver the same returns as in the past, but it will still beat bonds and cash. And, as we said in 1868, diversifying globally is a very good idea.