Who shot the sheriff?

It’s the end of the World Trade Organisation as we know it

And America feels fine




“Winter is coming,” warned a Norwegian representative on November 22nd, at a meeting of the World Trade Organisation (wto). The multilateral trading system that the wto has overseen since 1995 is about to freeze up.

On December 10th two of the judges on its appellate body, which hears appeals in trade disputes and authorises sanctions against rule-breakers, will retire—and an American block on new appointments means they will not be replaced. With just one judge remaining, it will no longer be able to hear new cases.

The wto underpins 96% of global trade. By one recent estimate, membership of the wto or General Agreement on Tariffs and Trade (gatt), its predecessor, has boosted trade among members by 171%. When iPhones move from China to America, or bottles of Scotch whisky from the European Union to India, it is the wto’s rules that keep tariff and non-tariff barriers low and give companies the certainty they need to plan and invest.

The system is supposed to be self-reinforcing. Mostly, countries follow the wto’s rules. But if one feels another has transgressed, then instead of starting a one-on-one trade spat it can file a formal dispute. If the wto’s ruling displeases either party, it can appeal. The appellate body’s judgments pack a punch.

If the loser fails to bring its trade rules into compliance, the winner can impose tariffs up to the amount the judges think the rule-breaking cost it. It is that punishment that deters rule breaking in the first place.

It is no surprise that President Donald Trump has axed these foreign arbiters, given his general distaste for internationally agreed rules. On November 12th he declared himself “very tentative” on the wto. But the problems run far deeper than dislike of multilateral institutions.

They stem from a breakdown in trust over the way international law should work, and the more general failure of the wto’s negotiating arm. Had the Americans felt that they could negotiate away their grievances, resentment towards the appellate body might not have built up. But with so many members reluctant to liberalise, including smaller countries fearful of opening up to China, that has been impossible.

America has had some wins at the wto: against the European Union for subsidies to Airbus, an aircraft-maker; and against China for its domestic subsidies; theft of intellectual property; controls on the export of rare earths, which are used to make mobile phones; and even its tariffs on American chicken feet.

But it has also been dragged before the appellate body repeatedly, in particular by countries objecting to its heavy-handed use of “trade remedies”: tariffs supposed to defend its producers from unfair imports. Time after time, it has lost. In such cases, it has generally sought to become compliant with the rules rather than buy the complainant off.

Though previous administrations had grumbled, and occasionally intervened in judges’ appointments, the Trump administration went further. Its officials complained that disputes often dragged on much longer than the supposed maximum of 90 days, and—more seriously—that the appellate body made rulings that went beyond what wto members had signed up to. They made it clear that unless such concerns were dealt with, no new judges would be confirmed.

Judicial overreach is in the eye of the beholder. Losers will always feel hard done by, and America has been quick to celebrate the wto’s rulings when it wins. But plenty of others think that the appellate body had overstepped its remit. A recent survey of individuals engaged with the wto, including national representatives, found that 58% agreed with that verdict.

Getting so many countries to sign up to the wto was a remarkable achievement. One way negotiators managed this was by leaving the rules vague, and papering over their differences with ambiguous language. Take “zeroing”, for example: using dubious mathematics to calculate defensive tariffs on unfairly traded imports. The Americans claim that the rules do not say they cannot do it. But others counter that the rules do not say they can. It is such long-running differences that have set the scene for the latest showdown.

Offer me solutions

The American trade lawyers happy to kill the appellate body see a fundamental difference between their attitude to international law, and that of Europeans. Their position is that only clear contractual terms can be enforced, and they see Europeans as more comfortable with resolving ambiguities by going beyond what is written.

Essentially, they regard the appellate body as too European. Moreover, in its eagerness to rule where terms are unclear, and in the American government’s willingness to change its laws in response, they feel an affront to America’s sovereignty.

Under the gatt, which lacked a proper enforcement system, ambiguities were hashed out in smoke-filled rooms. But the wto was supposed to make naked power politics over trade obsolete. Had it worked as intended, there would have been a balance between settling disputes and writing new rules.

Policy is best made with a vibrant judiciary interpreting the law, and a functioning legislative arm to fix any mistakes. Whenever the appellate body made decisions that annoyed members, they could have resolved their differences at the negotiating table. Perhaps America could have got others to agree to higher tariffs on imported steel, or been granted some flexibility in its defensive duties.

But the wto’s negotiating arm has been broken for years. With the current count of members at 164, it has become more inclusive, but is unable to get much agreed. Each member has a veto over any further multilateral trade liberalisation. And without new negotiations, resentment towards the appellate body has built up.


If you think this has a happy ending…


Had the multilateral system been more effective at dealing with the rise of China, perhaps the single biggest issue of its times, then calls to save it might be louder in Washington. Although various American administrations pursued and won several cases, the process was slow and occasionally frustrating.

America can justly claim that, when it tried to hold China to account for its breaches of trade rules, it got little support. America has been responsible for more than half of all complaints against China. And other wto members’ complaints were generally copycat, filed in America’s wake.

Now that the Trump administration has bypassed the wto and taken the fight straight to China, there is nothing remaining that it particularly wants from the wto. And so the chances that it will relent and allow nominations to the appellate body by December 10th are slim to none. In response to proposals from other members to change the body’s rules, an American representative said that they were not persuaded that the rules would be stuck to.

On November 26th the Trump administration suggested slashing the pay of members of the appellate body. In October Chuck Grassley and Ron Wyden, the top Republican and Democrat politicians on the Senate Finance Committee, published an editorial saying that while they saw the value of an appellate body, it “needs to operate as the members agreed”.




Of the wto’s 163 other members, 117 have signed a joint letter calling upon America to end the impasse. Although America has been the heaviest user of the dispute-settlement system, others will miss it too (see chart). Some have already begun preparing, for example by agreeing at the start of any disputes to forgo the right to appeal.

The eu, Canada and Norway have agreed on an interim arbitration mechanism that will use retired members of the appellate body as judges. And the eu is considering beefing up its own enforcement mechanism to fill the hole left by the appellate body, though it would probably cleave more closely to the outcomes of first-stage rulings in wto disputes.

But some members are likely to shun such alternatives—especially those that expect to be sued a lot. And it is unclear how robust they will be if disputes turn nasty. Some wto members may try to choose their dispute-settlement mechanism case by case. An organisation as ambitious as the wto, for all its faults, will be easier to break than replace.

All this means that global trade is about to become a lot less predictable and a lot more contentious. Without the appellate body to act as honest broker, disputes between the biggest members may escalate. Under the gatt America acted as global trade sheriff, launching investigations at will and bullying disputatious countries into submission. It is not impossible that it will resume this role.

On November 27th the Trump administration announced that it had nearly finished an investigation into a French tax on digital services, which America reckons discriminates against its tech giants. That could lead to tariffs.

You’ll miss it when it’s gone

In the 1980s American unilateralism was no fun for countries on the receiving end. But at least back then Uncle Sam could point to the lack of any other power even theoretically capable of doing the job.

Now the absence of independent referees is America’s own doing.

And of all Mr Trump’s trade policies, it may prove the hardest to reverse and have the longest-lasting effects.

The death of Chile’s pension promise

Protesters urge overhaul of system once lauded as the ‘Mercedes-Benz’ of retirement provision

Benedict Mander in Santiago

A demonstrator gestures in front of a burning barricade next to a looted shop during a protest against Chile's government in Valparaiso, Chile November 26, 2019. REUTERS/Goran Tomasevic     TPX IMAGES OF THE DAY
© Reuters


Ten years after retiring, Patricia Azagra considers herself to be one of Chile’s lucky ones. Unlike many, she held a steady job for almost her entire working life and made regular contributions to her pension for more than 30 years.

Even so, her monthly pension of about $600 is scarcely one-third of her final salary, and about half what she was promised when she first started paying into Chile’s pioneering pensions system in the 1980s. Getting by without help from her children was “impossible”, she said.

“Thank God I also have my health,” said the 75-year-old former municipal social worker, who fears having to rely on Chile’s expensive privatised health system. “Of course I can’t afford holidays or anything but the most basic costs. If the slightest thing happens to me — bang! — I will fall into poverty.”

Her situation, precarious though it is, is at least better than that of the 44 per cent of Chilean pensioners who receive less than the minimum wage of about $400.

As Chileans of all ages take to the streets in protest at persistent poverty and social injustices, the irony for many is that the pensions system they want President Sebastián Piñera to overhaul was once globally hailed as an engine for economic prosperity — the “Mercedes-Benz” of retirement provision.

Chile was the first country in the world to privatise its pensions system. Established almost 40 years ago during General Augusto Pinochet’s military dictatorship, the defined contribution model was widely praised by institutions such as the World Bank and seen as a key part of the Chilean economic success story.

Reliant solely on a mandatory 10 per cent contribution from employees, it was copied by more than 30 countries across Latin America, south-east Asia and eastern Europe. Buoyed by regular payments, the Chilean pensions system grew and the country’s embryonic capital market roared to life: pension funds now exceed $200bn, or 80 per cent of gross domestic product. This played a crucial role in turning Chile into the richest country in the region, lifting millions out of poverty.

But the system is designed to benefit those who remain in formal employment for much of their working lives and are thus able to make regular payments. Chile’s large informal sector — as many as one-third of the population are in irregular employment — means that many people pay little or nothing over their lives.

“It’s a system that doesn’t work for the reality of Latin America,” said Andras Uthoff, a pensions expert in Santiago. The privatised system “works fine for about a fifth of the population, but not for the vast majority. They were forgotten about,” he added.

“Chile never left behind the [neoliberal] model installed by Pinochet and now it is paying the price,” said Andrés Solimano, an economist and former World Bank country director in Santiago. “That model is exhausted in its current form, and needs a serious upgrade. There is no social safety net in Chile.”


An elderly man holds a sign bearing the message 'Thanks, brave youth' during protests against the government in Santiago © Johan Ordonez/Getty


Analysts argue that a saving rate of 10 per cent — almost half the level of contributions in developed countries — is too low to deliver retirees a decent income. Retirement ages, at 65 for men and 60 for women, also remain low, given that life expectancy has risen by a decade since the early 1980s.

Much of the debate — and the anger on the streets — has focused on the private pension funds that critics say have outsized profits while paying out sometimes derisory pensions. A ubiquitous slogan on protesters’ banners and graffiti around Santiago is “No more AFPs”, referring to Chile’s private pension fund managers.

Fernando Larraín, director-general of the pension administrators’ association, said that even if all of their profits were given to pensioners, that would amount to less than $13 per person. “That’s all very well, but it doesn’t solve anything,” he said, arguing that ultimately what is needed is better pensions, which would need to be at least partly government-funded. “There is a solution, but it is expensive. Where is the money going to come from?”

Previous governments have tried to tweak the system, to allow some state support for those on the lowest incomes. Since 2008, the government has paid a basic pension to the poorest workers, amounting to scarcely $150 a month. That costs the government about 0.8 per cent of GDP, and compares with a 6 per cent average in OECD countries.

Further changes were under discussion even as protesters remained on the street this month. A 50 per cent rise in the basic state pension has been agreed in congress, which would cost the state an extra $1.3bn annually, and there are proposals for employers to make an extra contribution of 5 per cent to a new state agency.

“It’s the cost of doing business,” said Jonathan Callund, a pensions policy consultant based in Santiago, pointing out that while employers have not until now made direct contributions to pensions, the Pinochet reforms forced them to compensate by paying higher wages. “When it comes down to it, as everywhere else in the world, all social security contributions are paid by the employer. This is clear as day.”

Rodrigo Valdés, a former finance minister, fears a populist solution to Chile’s pension problem could compromise fiscal equilibrium. “The elastic has already been stretched, and I don’t know at what point it will snap. It depends how irresponsible the government wants to be.”

Whoever Wins in Britain’s Election, Big Government Spending Is Back

Conservative Boris Johnson has plans costing billions; Labour’s Jeremy Corbyn has even bigger ideas

By Jason Douglas



BARNSLEY, England—The fiscal brakes are coming off.

Prime MinisterBoris Johnsonis promising voters in Thursday’s U.K. election £100 billion ($128 billion) of investment in infrastructure and billions more for policing and health care.

His main rival, the Labour Party’sJeremy Corbyn,is offering an even greater bounty, with hundreds of billions in spending and borrowing to remake Britain as a 21st-century state-run economy, complete with free broadband in every home.


With these pledges, the U.K. joins the ranks of advanced economies where politicians are signaling an end to years of constrained fiscal policy. Public spending is back in vogue, even among some parties on the right with a traditional zeal for balanced budgets and a mistrust of big government.

In the U.S., President Trump’s tax cuts and military spending pushed the federal budget deficit to $1 trillion in the 12 months through October. France and Spain are relaxing budget goals to pay for tax cuts and extra social benefits to soothe disaffected voters.

Normally abstemious countries including the Netherlands, Finland and Germany are boosting outlays on welfare, defense and infrastructure. In Japan, Prime MinisterShinzo Abe’scabinet has approved a $120 billion stimulus program to revive flagging growth and help regions hit by an October typhoon.

The move toward greater fiscal activism comes after years of heavy lifting by monetary authorities that have left central banks depleted, and even maligned for exacerbating inequality by turbocharging asset prices.


Labour Party leader Jeremy Corbyn at a campaign event in Carlisle in northwest England. Photo: oli scarff/Agence France-Presse/Getty Images 


Populist movements of the left and right, meantime, have found fertile soil in regions left behind by patchy economic growth, leading mainstream parties to rewrite the economic playbook to keep voters sweet. Citizens grumble about creaking infrastructure and many fret that the private sector isn’t up to daunting challenges such as climate change.

The shift is coming at a time when economic clouds are darkening, with a U.S.-China confrontation over trade pinching growth and spooking investors.



Greater public investment could help lighten the gloom, with spending in areas such as infrastructure and education contributing to a healthier, more balanced expansion, say policy makers such as International Monetary Fund chief Kristalina Georgieva and outgoing European Central Bank President Mario Draghi.

The IMF and the European Commission—the European Union’s executive arm—are urging countries with fiscal room to spare to spend even more to keep the global economy humming.

“There’s a whole litany of reasons why this is the right thing to do,” said Adam Posen, a former Bank of England official who heads the Peterson Institute for International Economics, a think tank in Washington, D.C. Private investment is low and in many places infrastructure needs updating, he said, adding that low interest rates support borrowing for productive investment.

A fiscal shift isn’t without risk. Recent history is littered with instances, from Latin America to the eurozone, where investors have soured on administrations they viewed as profligate, prompting painful reversals when borrowing costs spiraled. A year ago, Italy’s then-populist government watered down its plan for greater borrowing in response to rising interest rates that were pushing the economy toward recession.

With unemployment low in many jurisdictions contemplating a fiscal splurge, extra spending could cause economies to overheat, requiring central banks to step on the brakes. Voters may balk at higher taxes, or grow more disillusioned still with mainstream politics if promises aren’t kept.

If spending promises are financed by borrowing, governments need to remember that today’s low interest rates may not last forever, saidKenneth Rogoff,professor of economics at Harvard University. The bill may fall due on taxpayers or pensioners when economic conditions are less benign, he said.

“The notion that it’s just free, that we can just spend more money and no one’s going to pay for it, is very naive,” he said.

In the U.K., such risks are heightened by the country’s planned departure from the European Union, which is clouding the economic outlook, unsettling investors and absorbing huge amounts of government time and energy. Faced with such uncertainty, investors might be unwilling to pony up for Britain at current low rates, said Mr. Posen of the Peterson Institute.

“Now, the regime shift is real. The U.K. may not be becoming Greece, but it might be becoming 1970s U.K.,” Mr. Posen said, a reference to the boom-and-bust cycles that dogged the economy in the past during spells of political and economic mismanagement.

In the turbulent period after 2009, many countries took steps to rein in ballooning budget deficits. The U.K.’s drive toward austerity stood out. Unlike Greece or Ireland, it wasn’t forced by creditors. And unlike the U.S., the U.K. eschewed tax increases, with successive Conservative-led governments since 2010 straining for budget discipline solely by shrinking state spending.

Conservative Prime MinisterMargaret Thatcherhad railed against big government when in the 1980s she made the U.K. into the crucible of a free-market revolution that swept the globe.

Now, ahead of the election, Mr. Johnson has rewritten his party’s fiscal rules to permit £100 billion of extra borrowing over the next five years to plow into capital projects.

Already the Conservatives have penciled in £22 billion of that for revamping schools, building new flood defenses and greening the economy. They have earmarked £500 million a year to fix potholes. Mr. Johnson’s plans include spending on transport, high-speed broadband and house building, as well as extra cash for voters’ cherished National Health Service.

Voters are also being promised some personal tax cuts, paid for largely through scrapping a planned reduction in corporation tax.

Behind Mr. Johnson’s pitch are political imperatives. He needs to sweep up opposition-held districts to win big enough to meet his goal of taking the U.K. out of the European Union by the current target date of Jan. 31.
Boarded-up houses in the town of Barnsley in the north of England Photo: Fabio De Paola for The Wall Street Journal 


In promising a fiscal boost, he is aiming to sharpen his appeal among traditional Labour voters in areas that support Brexit. Research suggests the British electorate is growing more concerned about poverty and eager for more public spending after years of government restraint, saidTorsten Bell,director of the Resolution Foundation, a nonpartisan London think tank focused on living standards.

“Austerity fatigue has definitely set in,” he said.

The economic and political forces fueling the shift toward greater spending are at play in places such as Barnsley, a former coal-mining town in northern England.




Voters complain of dilapidated transport links and worsening homelessness, and plead for relief after years of belt-tightening. Between 2010 and 2018, public spending in Barnsley and surrounding districts, an urban area of 250,000, shrank by 40% after adjusting for changes in prices, according to an analysis by the Centre for Cities, a think tank focused on boosting urban economies.
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“The town has suffered greatly over the last 10 years,” saidAndrew Mayo,an administrator with a charity. “There’s no money anymore.”

One manifestation is the local rail service. Visitors arriving by rail from neighboring Sheffield do so on twin-carriage “Pacer” trains converted from buses in the 1980s.

“Pacer trains should have been consigned to the railway museum many years ago,” saidDan Jarvis,a Labour lawmaker who is seeking re-election on Thursday.

Barnsley has for years been a Labour stronghold, but it also voted heavily in favor of leaving the EU in 2016, putting it in Mr. Johnson’s sights. The Conservatives are projected to win at least one of the area’s four districts Thursday, according to an analysis by pollster YouGovpublished Tuesday.

A challenge both main parties face is from the Brexit Party, an upstart group with a populist bent that advocates an abrupt split with the EU.
Andrew Mayo, administrator for a Barnsley charity, intends to vote Labour. A Brexit Party advertisement near Barnsley. Photos: Fabio De Paola for The Wall Street Journal(2)


As the campaign has moved along, the party’s popularity has weakened sharply. But it is still siphoning pro-Brexit voters from the Conservatives and Labour in a handful of areas, which could make the difference between an outright victory or another hung Parliament.

In the race for votes, fiscal policy is center-stage. Mr. Johnson has laid out plans for a “leveling up” of the British economy to narrow the gap between northern regions and the affluent south around London.

To further extend the party’s appeal, he also has diluted the Thatcherite vision that has long dominated Conservative thinking. His party’s manifesto, for example, contains a pledge to hand government ministers the power to aid struggling businesses with taxpayer cash—a policy popular with voters but anathema to free-marketeers. The government’s ability to bail out failing companies is also constrained by membership of the EU.

“People voted to take back control,” Mr. Johnson said at a recent stump speech, referring to the 2016 referendum on exiting the EU.

Mr. Corbyn’s calculation is that Britons are ready to swing behind his vision for a Britain steered by a more interventionist state, where the government owns or controls companies providing banking, postal services, mass transit, generic drugs and telecommunications.


'Pacer Trains'—converted buses—still appear at the Barnsley rail station. Photo: Fabio De Paola for The Wall Street Journal 


Labour’s manifesto calls for an £80 billion-a-year increase in day-to-day spending—paid for through higher taxes on corporations and high-earners—and hundreds of billions of pounds of borrowing to finance nationalizations, public works and investment in low-carbon technologies.

His plans for a greener Britain echo the Green New Deal proposal in the U.S. that prescribes huge public spending to wean the country off fossil fuels and create jobs.

Opinion polls suggest Mr. Johnson has the edge. The Conservatives are projected to emerge as the largest party in Thursday’s vote, though opposition parties may yet deprive Mr. Johnson of the comfortable majority needed to govern freely.

Under Conservative plans, state spending as a share of gross domestic product would rise modestly, to 41% by 2024, from just under 40%, according to the Resolution Foundation. Labour’s plans imply a bigger uplift, to 45%. Under both parties’ plans, public investment would rise to levels not seen in the U.K. since the 1970s.

On average, government spending in rich nations will rise to 41% of national income by 2021, from 40% in 2018, the Organization for Economic Cooperation and Development projects.

That would mark the first turnabout since 2009.



Silvia Dall’Angelo,senior economist at Hermes Investment Management in London, said many investors would welcome higher government spending, especially if targeted at solving economic problems such as feeble productivity growth.
After a long spell of monetary stimulus, “it’s time to try something different,” she said.

A major challenge for governments, say former policy makers and officials, will be following through. In the U.S., political bickering has scotched efforts to get bipartisan approval for a $2 trillion package of infrastructure spending.

Countries pledging new outlays on roads, railways and bridges, or promising extra services such as child care, will have to deal with the time-consuming nitty-gritty of securing permissions, drawing up plans and finding workers.

“Just announcing telephone numbers of extra spending does not necessarily translate into good-value investments or better services,” saidJill Rutter,a former U.K. Treasury official who’s now a senior fellow at the Institute for Government, a London think tank focused on improving policy-making.


The Barnsley Churches Drop-in Project serves hot food to the needy. Photo: Fabio De Paola for The Wall Street Journal 


Whoever wins, voters in Barnsley are skeptical much will change. “Most people think those promises have been made before and they never happened,” saidPeter Mulrooney,vice chairman of Barnsley Churches Drop-in Project, a charity that helps drug addicts and the homeless.

Andrew Shaw, a record-store owner, said he would probably vote Labour, but he fears a new burst of spending from either party could prove fleeting, leading to an eventual reckoning.

“I’m worried that my daughter will just get another raft of austerity in 10 years,” he said.


Andrew Shaw, owner of Vinyl Underground Records in Barnsley Photo: Fabio De Paola for The Wall Street Journal

Meet the Leftish Economist With a New Story About Capitalism

Mariana Mazzucato wants liberals to talk less about the redistribution of wealth and more about its creation. Politicians around the world are listening.

By Katy Lederer


Mariana Mazzucato in Bellagio, Italy. She argues against the long-accepted binary of an agile private sector and a lumbering, inefficient state.Credit...Isabella de Maddalena for The New York Times


Mariana Mazzucato was freezing. Outside, it was a humid late-September day in Manhattan, but inside — in a Columbia University conference space full of scientists, academics and businesspeople advising the United Nations on sustainability — the air conditioning was on full blast.

For a room full of experts discussing the world’s most urgent social and environmental problems, this was not just uncomfortable but off-message. Whatever their dress — suit, sari, head scarf — people looked huddled and hunkered down. At a break, Dr. Mazzucato dispatched an assistant to get the A.C. turned off. How will we change anything, she wondered aloud, “if we don’t rebel in the everyday?”

Dr. Mazzucato, an economist based at University College London, is trying to change something fundamental: the way society thinks about economic value. While many of her colleagues have been scolding capitalism lately, she has been reimagining its basic premises.

Where does growth come from? What is the source of innovation? How can the state and private sector work together to create the dynamic economies we want? She asks questions about capitalism we long ago stopped asking. Her answers might rise to the most difficult challenges of our time.

In two books of modern political economic theory — “The Entrepreneurial State” (2013) and “The Value of Everything” (2018) — Dr. Mazzucato argues against the long-accepted binary of an agile private sector and a lumbering, inefficient state. Citing markets and technologies like the internet, the iPhone and clean energy — all of which were funded at crucial stages by public dollars — she says the state has been an underappreciated driver of growth and innovation. “Personally, I think the left is losing around the world,” she said in an interview, “because they focus too much on redistribution and not enough on the creation of wealth.”

Her message has appealed to an array of American politicians. Senator Elizabeth Warren, Democrat of Massachusetts and a presidential contender, has incorporated Dr. Mazzucato’s thinking into several policy rollouts, including one that would use “federal R & D to create domestic jobs and sustainable investments in the future” and another that would authorize the government to receive a return on its investments in the pharmaceutical industry. Dr. Mazzucato has also consulted with Representative Alexandria Ocasio-Cortez, Democrat of New York, and her team on the ways a more active industrial policy might catalyze a Green New Deal.

Even Republicans have found something to like. In May, Senator Marco Rubio of Florida credited Dr. Mazzucato’s work several times in “American Investment in the 21st Century,” his proposal to jump-start economic growth. “We need to build an economy that can see past the pressure to understand value-creation in narrow and short-run financial terms,” he wrote in the introduction, “and instead envision a future worth investing in for the long-term.”

Formally, the United Nations event in September was a meeting of the leadership council of the Sustainable Development Solutions Network, or S.D.S.N. It’s a body of about 90 experts who advise on topics like gender equality, poverty and global warming. Most of the attendees had specific technical expertise — Dr. Mazzucato greeted a contact at one point with, “You’re the ocean guy!” — but she offers something both broad and scarce: a compelling new story about how to create a desirable future.

‘Investor of first resort’

Originally from Italy — her family left when she was 5 — Dr. Mazzucato is the daughter of a Princeton nuclear physicist and a stay-at-home mother who couldn’t speak English when she moved to the United States. She got her Ph.D. in 1999 from the New School for Social Research and began working on “The Entrepreneurial State” after the 2008 financial crisis. Governments across Europe began to institute austerity policies in the name of fostering innovation — a rationale she found not only dubious but economically destructive.

“There’s a whole neoliberal agenda,” she said, referencing the received free-market wisdom that cutting public budgets spurs economic growth. “And then the way that traditional theory has fomented it or not contested it — there’s been kind of a strange symbiosis between mainstream economic thinking and stupid policies.”

Dr. Mazzucato takes issue with many of the tenets of the neoclassical economic theory taught in most academic departments: its assumption that the forces of supply and demand lead to market equilibrium, its equation of price with value and — perhaps most of all — its relegation of the state to the investor of last resort, tasked with fixing market failure. She has originated and popularized the description of the state as an “investor of first resort,” envisioning new markets and providing long-term, or “patient,” capital at early stages of development.

In important ways, Dr. Mazzucato’s work resembles that of a literary critic or rhetorician as much as an economist. She has written of waging what the historian Tony Judt called a “discursive battle,” and scrutinizes descriptive terms — words like “fix” or “spend” as opposed to “create” and “invest” — that have been used to undermine the state’s appeal as a dynamic economic actor. “If we continue to depict the state as only a facilitator and administrator, and tell it to stop dreaming,” she writes, “in the end that is what we get.”

As a charismatic figure in a contentious field that does not generate many stars — she was recently profiled in Wired magazine’s United Kingdom edition — Dr. Mazzucato has her critics. She is a regular guest on nightly news shows in Britain, where she is pitted against proponents of Brexit or skeptics of a market-savvy state.

Alberto Mingardi, an adjunct scholar at the libertarian Cato Institute and director general of Istituto Bruno Leoni, a free-market think tank, has repeatedly criticized Dr. Mazzucato for, in his view, cherry-picking her case studies, underestimating economic trade-offs and defining industrial policy too broadly. In January, in an academic piece written with one of his Cato colleagues, Terence Kealey, he called her “the world’s greatest exponent today of public prodigality.”

Her ideas, though, are finding a receptive audience around the world. In the United Kingdom, Dr. Mazzucato’s work has influenced Jeremy Corbyn, leader of the Labour Party, and Theresa May, a former Prime Minister, and she has counseled the Scottish leader Nicola Sturgeon on designing and putting in place a national investment bank. She also advises government entities in Germany, South Africa and elsewhere. “In getting my hands dirty,” she said, “I learn and I bring it back to the theory.”

The ‘Mission Muse’

During a break at the United Nations gathering, Dr. Mazzucato escaped the air conditioning to confer with two colleagues in Italian on a patio. Tall, with a muscular physique, she wore a brightly colored glass necklace that has become something of a trademark on the economics circuit. Having traveled to five countries in eight days, she was fighting off a cough.

“In theory, I’m the ‘Mission Muse,’” she joked, lapsing into English. Her signature reference is to the original mission to the moon — a state-spurred technological revolution consisting of hundreds of individual feeder projects, many of them collaborations between the public and private sectors. Some were successes, some failures, but the sum of them contributed to economic growth and explosive innovation.

Dr. Mazzucato’s platform is more complex — and for some, controversial — than simply encouraging government investment, however. She has written that governments and state-backed investment entities should “socialize both the risks and rewards.” She has suggested the state obtain a return on public investments through royalties or equity stakes, or by including conditions on reinvestment — for example, a mandate to limit share buybacks.

Emphasizing to policymakers not only the importance of investment, but also the direction of that investment — “What are we investing in?” she often asks — Dr. Mazzucato has influenced the way American politicians speak about the state’s potential as an economic engine. In her vision, governments would do what so many traditional economists have long told them to avoid: create and shape new markets, embrace uncertainty and take big risks.

Inside the conference, the news was uniformly bleak. Pavel Kabat, the chief scientist of the World Meteorological Organization, lamented the breaking of global temperature records and said that countries would have to triple their current Paris-accord commitments by 2030 to have any hope of staying below a critical warming threshold.

A panel on land use and food waste noted that nine species account for two-thirds of the world’s crop production, a dangerous lack of agricultural diversity. All the experts appeared dismayed by what Jeffrey Sachs, the S.D.S.N.’s director, described as the “crude nationalism” and “aggressive anti-globalization” ascendant around the world.

“We absolutely need to change both the narrative, but also the theory and the practice on the ground,” Dr. Mazzucato told the crowd when she spoke on the final expert panel of the day. “What does it mean, actually, to create markets where you create the demand, and really start directing the investment and the innovation in ways that can help us achieve these goals?”

Earlier in the day, she pointed at an announcement on her laptop. She had been nominated for the first Not the Nobel Prize, a commendation intended to promote “fresh economic thinking.” “Governments have woken up to the fact the mainstream way of thinking isn’t helping them,” she said, explaining her appeal to politicians and policymakers. A few days later, she won.

The Billionaire Problem

Writing in the 1830s, as the Industrial Revolution gathered pace, Honoré de Balzac anticipated the broader social concern: “The secret of great fortunes without apparent cause is a crime that has been forgotten, because it was properly carried out.” But today's billionaires make forgetting imposible.

Simon Johnson

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WASHINGTON, DC – Our billionaire problem is getting worse. Any market-oriented economy creates opportunities for new fortunes to be built, including through innovation. More innovation is likely to take place where fewer rules encumber entrepreneurial creativity. Some of this creativity may lead to processes and products that are actually detrimental to public welfare. Unfortunately, by the time the need for legislation or regulation becomes apparent, the innovators have their billions – and they can use that money to protect their interests.

This billionaire problem is not new. Every epoch, dating at least from Roman times, produces versions of it whenever some shift in market structure or geopolitics creates an opportunity for fortunes to be built quickly. Writing in the 1830s, as the Industrial Revolution gathered pace, Honoré de Balzac anticipated the broader social concern: “The secret of great fortunes without apparent cause is a crime that has been forgotten, because it was properly carried out.” Or, in the more popular paraphrase: behind every great fortune lies a great crime.

Prominent historical examples include the British East India Company, the Europeans who built vast fortunes based on African slave labor in the West Indies, and coal mine owners. All became rich fast, and then used their political clout to get what they wanted, including impunity for horrendous abuses. At their peak in the nineteenth century, railway interests held sway over many or perhaps even most members of the British parliament.

The United States has long exhibited a particularly potent strain of the billionaire problem. This is partly because America’s founders, in their pre-industrial innocence, could not imagine that money would capture politics to the extent that it has (or that was fully apparent just a few decades later). Moreover, US leaders were long willing to let private enterprise take on new projects that elsewhere fell into the hands of the state.

The German post office, for example, built one of the most extensive and efficient telegraph systems in the world. Samuel Morse urged Congress to do the same (or better). But US telegraph communication was instead developed privately – as was the telephone system that followed, all of iron and steel, the entire railroad network, and just about every other component of the early industrial economy.

When the US government did become involved in economic activity, it was mostly to open up new frontiers – creating more opportunity for individuals and private business. In the aftermath of World War II, Vannevar Bush – a Republican who was also a top adviser to President Franklin D. Roosevelt – cleverly argued that science represented the next frontier, and hence constructed a winning political argument for the government to act as a catalyst.

As Jonathan Gruber and I have argued recently in our book Jump-Starting America, the post-war federal government’s strategic investments in basic science spurred remarkable private-sector innovation – including productivity gains and widely shared increases in wages. Vast new fortunes were created.

The political consequences of America’s post-war private-sector boom were felt within a generation, and they were not always positive. From the 1960s, the US experienced growing anti-tax sentiment, strong pressure for deregulation (including for the financial sector), and a lot more corporate money pouring into politics through every possible avenue.

In recent decades, this corporate lobbying has had two main effects. First, by erecting entry barriers to existing sectors, it protects incumbents and lowers their effective tax rates. This is a deadweight loss – a pure drag on economic growth that limits opportunities for everyone who is not already an oligarch.

As US public finances are eroded by oligarchy, so is the ability to fund essential infrastructure, improvements in education, and the kind of breakthrough science that brought America to this point.

Some of America’s billionaires earn kudos for their philanthropy. At the same time, most of them adopt a dog-in-the-manger attitude throughout their business operations – digging deeper moats to protect profits or simply destroying smaller business at every opportunity.

There is a second effect, which is more nuanced. In some entirely new sectors, particularly in the digital domain, entry was possible at least during an early phase. The entrepreneurs who built the first Internet companies were not able to put up effective entry barriers – hence the runaway success (and greater billions) of more recent companies such as Facebook, Amazon, and Uber.

But now the controlling shareholders of these new behemoths operate pretty much in the same way as Andrew Carnegie, John D. Rockefeller, and the original J.P. Morgan once did. They use their money to buy influence and resist any kind of reasonable restraint on their anti-competitive and anti-worker behavior – even if it undermines democratic institutions.

We will always have billionaires. Ex post regulation and higher rates of taxation are appealing today but, looking forward, will they prove sufficient in a political system that allows individuals to spend as much as they like to get whatever they want (and repeal whatever they hate)? It’s time for a new approach, as Gruber and I propose.

Big profits follow from big new ideas. That’s why federal science funding should be designed to include upside participation in the enterprises that will be created. The public deserves much more direct participation in those profits. And the billionaires should have to make do with fewer billions.


Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with Jonathan Gruber, of Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream.