Elites on the Edge 

By John Mauldin

Growing income and wealth inequality were on my (and probably your) radar screen long before COVID-19 came along. The pandemic has made them both more obvious and more urgent. 

The actions by the Federal Reserve have widened the gap. We are now in a situation where society’s upper echelon can easily stay safe and prosperous while the lower segments live precariously and dangerously.

It’s actually worse than that. The upper end is safe precisely because millions of “essential” workers are producing and delivering the goods we need, placing themselves at risk in the process. That’s always been the case to some degree. Now it is clearer, and the stakes are higher.

Two weeks ago I talked about Peter Turchin’s idea of “elite overproduction” leading to social and economic crisis. What I read sounded disturbingly like our present situation. 

Further reading wasn’t any more comforting. While he doesn’t have any solutions, Turchin helps illuminate how we reached this point. Today we’ll go a little deeper and think about the implications. As you’ll see, there are many.


The “memes” we see on social media, even the anonymous ones, are often revealing. Here’s one that made the rounds this year.

Source: TruthorFiction.com

As far as I can tell, no one has been able to verify this story or trace it to the source. It might not be true but it’s completely plausible. I know people who went through such experiences. You probably do, too. They followed the rules, did everything right, then cancer or some other bolt from the blue demolished everything. Happens all the time.

But here’s the thing: This doesn’t happen to everyone. The top layer, the fabled 1% or 10% or wherever you want to draw the line, don’t lose everything when somebody gets cancer. They are, to use Peggy Noonan’s term, a “protected” class. The link is to a letter I wrote in 2016, describing the frustration in both political parties with what they considered “the elites.” I talked about how the protected class doesn’t really understand the stomach-churning reality of the unprotected class for whom just one blown tire, a trip to the emergency room, or other personal disaster completely wipes out their meager savings. They look at those who appear able to afford whatever they need, “the protected class,” and wonder why is that not me? They want to be in that class, too.

But it’s not easy to join, as I’ve been lamenting for years. Peter Turchin’s work adds to my concern. He notes, looking at many civilizations through history, that prosperity creates more wealth and wealthy people. The problem is their numbers tend to grow faster than the number of “elite” positions or jobs. In the US, for instance, we have 100 senators and 435 House members. Those numbers are fixed while the number of people who think they are qualified to hold office grows. Hence our large chattering class that circles the Washington beltway without any real power. Wall Street has a similar pattern. So do large companies, universities, state and local governments—basically all the institutions that compose society’s backbone.

Meanwhile, a layer or two below are large numbers of people who want to join the top ranks. They think education is the key. Get a college degree and the doors to success will open. That’s not wrong, either. But here again, not all degrees are equal. Much depends on where you go to college and who you meet there. Grades aren’t the only factor.

Regardless, millions load up on debt trying to get those degrees Many find themselves without the desired diplomas but still saddled with the debt. And it’s not just college degrees; people go into debt seeking law, MBA, medical, and other credentials they think will open the desired doors. Loose monetary policy subsidizes and encourages these ambitions while simultaneously inflating asset prices, which make them difficult, if not impossible to achieve.

So you end up with a group of potential educated elites who can’t attain or maintain the status they think they deserve, and another group below them demanding that same status. Turchin says the next step is for some of the disaffected elites to become “counter-elites” and make alliances with the lower classes, which then seek to take power. Think of 2016, when the UK had the Brexit referendum and the US saw Trump win the White House. Populist movements around the world are partly a manifestation of elite conflict.

Financial Neutron Bomb

Some of my critics (whom I love dearly, by the way) accuse me of thinking central banks are the root of all evil. That’s not what I think at all. I believe we need central banks, just not the policies we are currently getting. I believe ill-considered central bank actions cause and/or aggravate many problems.

The income and wealth inequality that now plague us are, to a great degree, the result of persistently and artificially low interest rates. This goes back long before the Great Financial Crisis. 

Here’s the Federal Funds Rate, which the Fed directly controls, since 1955.

Source: St. Louis Fed

You can see rates have been generally falling since the early 1980s. I think it is not coincidence this is the same period in which wage growth lagged productivity growth, and the gap widened between the wealthiest Americans and the middle class.

This is easy to understand if you follow the process. Interest rates are the price of money, and money helps you make more money. Hence, lowering its price is a gift to those who are in the best position to invest it. 

This is an investment newsletter, so most of you reading it are probably in that category. But most of America isn’t.

Until recently, the most sophisticated “investing” most Americans did was to have a bank savings account or maybe a certificate of deposit. And for a long time, that was enough. 

An average person could save a little of every paycheck, make risk-free 5% or 7% yields, and build up a nest egg or the down payment on a house. That is now impossible. You are lucky to get 0.1% from your bank.

This “financial repression” has all kinds of negative effects. For one, it encourages excess consumption. Why save anything when you get no reward? Easier to go on vacation or buy a nicer car. Those who do save anything have to take risks for which they may not be prepared. We know how that usually ends.

So over time, a growing number of people reach middle age or retirement age with little or no savings (and often a lot of debt) and find the kind of lifestyle they were told to expect isn’t possible. This is a recipe for discontent and resentment. No surprise, we have plenty of both

But it’s even worse.

Those same low interest rates encourage speculation that raises asset prices, particularly for housing. So lower-income people have to spend more just for a place to sleep. This is good for the landlords collecting rent from them, at least for a while. Ditto for the university administrators and trade schools that offer a chance to climb the ladder—for a price.

Similarly, low interest rates subsidize job automation. In the long run, that’s actually good for workers, but in the here-and-now it eliminates jobs and suppresses wages. So the middle class finds itself making less and spending more. That can’t go on indefinitely.

Now bring in COVID-19. This pandemic hit our economy like a neutron bomb, wiping out millions of low-wage service jobs while leaving the protected classes unharmed and in some cases actually better. And even the rescue wasn’t even-handed.

  • Jobless restaurant workers got a few months of generous unemployment benefits, which have now expired (and may not be extended).
  • Small business owners got PPP “forgivable loans” that came with complex rules and strict limits on how they could spend it (and many who couldn’t apply quickly didn’t even get that).
  • Large businesses got, thanks to the Fed (and Congress), trillions in practically free cash and permission to spend it however they wanted. In many cases, that meant share buybacks and executive bonuses.

Is it any wonder people want to join the elite, and are angry they can’t? The process Turchin describes fits our present circumstances to a T. And they come at a time when we are already bitterly divided in so many other ways.

Cameron Murray, in a review of Turchin’s latest book, offers this foreboding paragraph:

[T]here is a pattern that we see recurring throughout history, when a successful empire expands its borders so far that it becomes the biggest kid on the block. When survival is no longer at stake, selfish elites and other special interest groups capture the political agenda. The spirit that “we are all in the same boat” disappears and is replaced by a “winner take all” mentality. As the elites enrich themselves, the rest of the population is increasingly impoverished. Rampant inequality of wealth further corrodes cooperation.

In past centuries and millennia, the lack of internal cooperation invited aggressive neighbors to conquer the disorganized country. Rome was not so much conquered by “barbarians” as it committed societal suicide, when the glue that held it together, the cooperation of all factions, simply disappeared.

Gary North, (one of my first true historical mentors), in a long and technical 2011 essay, talked about the famous historian Robert Nisbet.

In 1953, his [Nisbet’s] book, The Quest for Community, was published by Oxford University Press. It received some attention, mostly favorable, but it was hardly a bestseller. He asked these questions: "Why was it that the modern world had turned to totalitarianism in the middle of the 20th century? What had taken place in the societies that gave birth to totalitarianism?" He concluded that it had to do with the breakdown of social order. Those institutions to which men had given allegiance throughout history, such as the family, the church, the guild, the fraternal order, and similar voluntary institutions, had faded in importance in the twentieth century. This left only the isolated individual and the modern nation-state. Men gained a sense of belonging through their participation in mass-movement politics. Totalitarian leaders began to attract individuals who were isolated, even though they were living in large cities. These leaders were able to offer a sense of brotherhood to millions of people who felt alone in the midst of cities. The modern totalitarian state functioned as a substitute for the family, church, and voluntary associations that for millennia had given people a sense of purpose and participation. So, totalitarianism was born out of radical individualism, institutionally speaking, even though as a philosophy, totalitarianism is completely opposed to individualism.

Sound familiar? In a world of increasing identity politics, it may not be the same, but it certainly rhymes. North went on to analyze another equally famous philosopher of history, Jacques Barzun, who wrote his final opus at 93 in 2000 (his first book was in 1927):

He asks the question: "What makes a nation?" He answers his own question. "A large part of the answer to that question is: common historical memories. When the nation's history is poorly taught in schools, ignored by the young, and proudly rejected by qualified elders, awareness of tradition consists only in wanting to destroy it." Nisbet had made the same point two decades earlier.

Thus we tear down the monuments to our founding fathers and even the heroes of the anti-slavery movements because we have no sense of human progress, only a concern for the grievances of today.

We Are on a Journey

I like to end these letters on a positive note. We won’t have much to celebrate if the process unfolds the way Turchin says it historically does. But that doesn’t mean we are all doomed. Having the walls collapse on top of you isn’t the same as having them collapse around you. The latter is survivable, though hardly pleasant.

Neil Howe, George Friedman, Peter Turchin, (and may I humbly include myself), all point to the 2020s as a stressful, tumultuous period. But we also expect a period of calm afterward, a sense of unity not unlike the post-World War II years.

You must not let yourself get so caught up in political partisanship and societal angst that it takes your eyes off the fact that “this too shall pass.” We live in an age of wonderful transformation. If you focus on attention-grabbing media you will miss the truly important events, the things that will actually change society and make our lives better. The very things you should be participating in to make sure that you and your family not only survive but prosper in a new golden age.

While it goes without saying that nobody will want to go back to the year 2020, I believe in the 2030s no one will want to go back to any prior time period. Clearly, we have a number of things that have to be sorted out. We will do that, perhaps using the maxim (often attributed to Winston Churchill), “Americans always do the right thing after they’ve tried everything else.”

And so I write this letter full of warnings and not exactly “feel-good material” We need to recognize where we are on the map to the future. We must also recognize we have not arrived. We are on a journey. It is time to gird up our loins and fight the good fight, to, as William F. Buckley said when launching the National Review: “Stand athwart history and yell stop!”

Decades later that line should be more than a conservative talking point. It needs to be on the lips of those who believe in the rightness of the American experiment, whether politically left or right. I don’t think I am going too far out on a limb when I say that what we’re doing is not working: politically, economically, socially, or culturally. The concerns over the protected versus the unprotected are real. The remarkably accelerating pace of change is unsettling to many, and is in fact forcing a change in many lifestyles. There is much work to be done, not just in the US but globally, to create a sense of “we’re all in this together.”

We are entering a decade in which many walls will come down. The goal is to not be under them at the time. That will require us to stay nimble and informed. I’m presently recalibrating all my businesses and investments to get through this time, and I suggest you do the same.

Speaking of which, we will shortly, and briefly, reopen membership to the Mauldin Economics Alpha Society, which is the most cost-effective way to get all our research and also gives you exclusive access to some extra benefits. Look for more details soon.

What Are Your Favorite 10 Technology Stocks?

Catherine Wood, founder of ARK Investment Management, was a highlight of my 2020 Virtual Strategic Investment Conference. I was spellbound listening to her. ARK is a global investment firm solely focused on disruptive innovation in things like artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology. 

They seek to invest in tomorrow’s leading technologies—the breakthroughs that will change and improve our lives. ARK sees a dramatically different future with mobile connected devises thanks to AI, gene editing and immunotherapies from DNA sequencing, adaptive robots, neural networks and autonomous batteries that power cars and houses to frictionless transfers in blockchain technology.

After the conference, I and my investment management team reached out to Cathie and asked her if she would be willing to work with us. Specifically, anyone can buy her ETFs and they are very good. We were interested in her highest-conviction stock ideas. 

After several months of due diligence work with her and her team, we are thrilled to be able to offer access to ARK’s highest-conviction top-10 stocks via a managed account on the CMG Mauldin Portfolios Platform. 

I encourage you to click here, provide some basic contact information, and my team at CMG Mauldin will send you a link to the video of Catherine’s conference presentation along with a description of the strategy and her highest-conviction ideas. 

I think you’ll really enjoy watching the interview and learning from Cathie. (Full disclosure: I am the chief economist for CMG. Mauldin Economics, LLC is not affiliated in any way with CMG.)

Puerto Rico Turns Quiet

Here in Puerto Rico the governor just issued a series of new restrictions to hopefully reduce COVID-19 cases. Whether they accomplish that or not, they will certainly put stress on the economy and individuals. Especially small businesses and, again, those in the unprotected class. We need the vaccines ASAP, for both health and economic reasons.

The crises I talked about above? I’ve written several times on how we will have to “Think the Unthinkable.” That is going to be the mantra for the 2020s. I expect we will be doing the unthinkable more than any of us can imagine and it will make us all very uncomfortable. But we must do it anyway.

And with that I will hit the send button. I trust you will have a good week and stay safe.

Your trying to find the sunny side of the street analyst,

John Mauldin
Co-Founder, Mauldin Economics

A grand bargain

Democracies must team up to take on China in the technosphere

A robust alternative is needed to China’s autocratic approach

America has long dominated the world in information technology (IT). Its government, universities and enterprising spirit have provided it with decades of leadership in hardware and software. 

Its military drones, satellites and “system of systems” give its armed forces a powerful edge over those of any competitor. Silicon Valley is more visited by foreign dignitaries and finders-of-fact than any other business locale in the world. 

One of its tech giants is currently worth over $2trn; three more are worth over $1trn. 

The contribution technology makes to the buoyancy of its markets is without equal.

China, too, has digital resources in abundance, not least its huge population of 1.4bn, which means it will eventually boast an even deeper pool of data and experts to develop AI models. The country’s digital giants, from Alibaba to Tencent, have already become ai and cloud-computing powers in their own right. 

Its people live online to an extent that Americans—many of whom still have cheque books—do not. The country’s Great Firewall keeps undesirable digital content out. 

Within the wall, tech firms are allowed to fight it out as long as they are happy helpers of China’s surveillance state.

And China is on the move. It is investing billions in emerging technologies, from ai and chip fabrication to quantum computing and 5G, a new generation of mobile networks. 

It is hacking other countries’ computer systems and grabbing intellectual property where it can. It is packing the organisations that develop global technical rules, such as the International Telecommunication Union. And it is pulling other countries into its orbit with initiatives such as the “digital Silk Road”, helping them build out their digital infrastructure.

President Donald Trump saw, correctly, that this made China a serious challenger to America’s digital supremacy. His humbling of Huawei, a Chinese telecoms-equipment maker, has begun a decoupling of Chinese and American it infrastructures and of the supply chains between China and America that will continue.

Many device-makers have already moved part of their production out of China and some will end up with two separate supply chains. Apple’s contract manufacturers, for instance, are setting up plants in India. TSMC, a Taiwanese chip firm, announced in May that it will build a facility in Arizona. 

Feeling its dependence on American semiconductor technology, China is doubling down on efforts to build its own. In software and other areas, too, bifurcation has begun—and not just because of bans against Chinese apps.

What Mr Trump was unable or unwilling to understand, though, was that China and America are not the only economies that matter in this contest, and that fact provides America with a potentially decisive advantage. India, the European Union, Japan and others all play crucial roles in the world’s it system—as do tech giants such as Alphabet, Apple and Microsoft.

All these entities, whether national or corporate, are at odds with the American government and often with each other over something or other in the it world, whether it be visas, privacy rights or competition complaints. But they would also all prefer a world in which international agreements, practices and expectations for it embody the values and interests they share with America, rather than those of China. 

And if democratic countries cannot agree on common rules in the digital realm, China could end up setting the rules for large swathes of the world. The result would be a technosphere engineered for the comfort and support of autocracies.

A partial catalogue of the past few months’ disagreements shows the fractiousness that stops the free world coming together on this—and how many opportunities for dealmaking there would be if it decided it should. America’s commerce department told foreign firms they could sell no more chips made using American technology to Huawei; its justice department filed an antitrust lawsuit against Google. 

America also pulled out of talks at the Organisation for Economic Co-operation and Development (OECD), a club of mostly rich countries, about how to tax the tech giants. 

India blocked dozens of Chinese apps, including TikTok, a popular video-sharing service, which the American government also wants to ban. 

The European Court of Justice (ECJ) struck down the “Privacy Shield” agreement between America and the European Union (EU), thus throwing the legal basis on which personal data flows across the Atlantic into doubt.

Europe has been trying for some time to carve out its own space in the digital realm as a protector of the citizenry—a noble goal made easier by the fact that the companies from which its citizens are being protected are mostly based the other side of the ocean. 

This has heightened tensions between Brussels, Washington and Silicon Valley. The ECJ’s ruling on the Privacy Shield is one example. The European Commission is drafting legislation that would weaken the power of America’s tech giants. 

Its proposed Digital Services Act would outlaw some of the firms’ business practices, such as bundling their services to take over new markets or displaying them more prominently than competing ones.

We will rock you

Some of the EU’s member states have also begun defending their right to rule their own digital roost, something now called “digital sovereignty”. There is talk of creating a European cloud within the American one. 

GAIA-X is a step down that road—a federation of clouds, launched by Germany and France in June, whose members agree to certain rules, such as allowing customers to choose where their data are stored and move freely to providers’ competitors if they wish. 

There is more to come: a “data strategy” on the table in Brussels would, if fully implemented, create “data spaces” ruled by European law and give people more rights on how their data are used.

These disputes offer ample space for mutually beneficial trade-offs. If America and its allies can reach good enough accommodations on the most contentious issues—notably privacy and competition—and find ways to live with the smaller contradictions and conflicts which remain, they can become a force to be reckoned with—one that others will need little encouragement to join. 

An insular America can remain a technology superpower. A connected America cemented into the rest of the world by means of a grand technopolitical bargain could be the hub of something truly unsurpassable.

There is a range of ideas about how to do this. In a recent report for the Council on Foreign Relations, a think-tank, Robert Knake imagines such a grand bargain taking the form of a “digital trade zone”, complete with a treaty organisation. America would “weaponise its digital trade relationships” in order to promote such things as cyber-security, privacy protection and democratic values on the internet. 

Only countries that comply with the organisation’s rules on such matters would be able to become members and only members would be allowed fully to trade with each other digitally. Violations would be dealt with by imposing sanctions and tariffs. 

“If the digital trade zone grows strong enough, China might see more benefit to co-operative engagement than to continued disruptive behaviour,” writes Mr Knake.

Others prefer to imagine something less formal, rules-based and punitive. In October three other think-tanks—the Centre for a New American Security (CNAS), merics of Germany and the Asia-Pacific Initiative of Japan—outlined a less exclusive construction. 

They propose that democratic countries form a “technology alliance” not subject to a formal treaty. It would be like the G7, which consists of America, Britain, Canada, France, Germany, Italy and Japan, and could one day, perhaps, include India and other countries from the Global South. 

It would hold regular meetings, as the imf and World Bank do, and issue consensus opinions, and it would invite other stakeholders—from ngos to tech firms—to pitch in.

Let us cling together

Until this month, such ideas seemed premature. But with Joe Biden soon in the White House, they have become more realistic: it will be high on the agenda of the “summit of democracies” he has promised to convene. Closer co-ordination and some new institutions to back it up are also more needed, and not just because of the Chinese threat. 

The coronavirus, by pushing much of human activity into the cloud, has emphasised the importance of the digital realm and its governance. Left alone, the world of technology will continue to disintegrate into a splinternet in which digital protectionism is widespread—much as the global financial system fell apart before the second world war.

To make sense of all this, it helps to see the political world as one in which technology is beginning to look ever more like geography. The geopolitical way of looking at the world, which was born in the 19th century and revolutionised strategic thinking in the 20th, was based on the idea that the geographical aspects of the physical world could be crucially important to the relations between states. 

Mountains that blocked transit and plains that permitted it; oilfields and coalfields; pinch-points where maritime traffic could be constrained. 

Where a state’s territory stood in respect to such geographical facts of life told it what it should fear and what it might aspire to, whose interests conflicted with its own and whose might align with them. In other words, geography was destiny.

The units of analysis for today’s nascent technopolitics are platforms: the technologies on which other technologies are built—and alongside them, increasingly, businesses, governments and ways of life. The platform of all platforms is the internet. 

Some of the things which stand upon it are huge and widely known, such as Facebook, others small and obscure, such as Kubernetes, a sort of software used in cloud computing. 

Like geographical territories, these platforms have their own politics. They have their own populations, mostly users, coders and other firms. They have their own laws, which lay out who can change code and access data. 

They have a position with respect to other platforms which underpin, compete with or build on them, just as territories have defined relationships with their neighbours.

And they have their own governance systems. Some are “open”. The most famous is Linux, an operating system created and maintained through co-operative efforts to which all are, in principle, free to contribute and from which all are welcome to benefit. 

Others are “closed”, as is the convention among many corporate-software makers, such as Oracle. Some are run like absolute monarchies, such as Apple under Steve Jobs, who was the final arbiter over the smallest details in his tech empire.

Don’t stop me now

Their dominant positions in this world of platforms give companies like Facebook and Google powers approaching or surpassing those of many countries. Yet countries can—as their economies become more digitised—be increasingly understood as platforms, too: national operating systems of sorts. 

Natural resources still count, but digital resources are gaining ever more relevance: skilled and well-trained tech workers, access to scads of data, computing power, internet bandwidth, industrial policy and venture capital. And as with technology platforms, a country’s competitiveness will, to a large extent, depend on how it manages and multiplies these resources.

America is a platform like Microsoft’s Windows and Android, Google’s mobile operating system. These mix aspects of open and closed systems, allowing others to develop applications for their platform, but also closely control it. America combines monopolies and a strongish state with lots of competition. 

Mainly thanks to this profitable amalgam, the country has given rise to most of the world’s leading tech firms. China is more like Apple and Oracle, which combine being closed with lots of internal competition. The European Union is best compared to an open-source project such as Linux, which needs complex rules to work. India, Japan, Britain, Taiwan and South Korea all run differently and have technology bases to match.

The rise of cloud computing and ai—the first a truly global infrastructure, the second its most important application—has heightened the tensions between these platforms. 

More and more value is created by using oodles of computing power to extract ai models from digital information generated by people, machines and sensors. The models can then be turned into all sorts of services. 

Transport, health care, teaching, campaigning, warfare—these parts of society will not become “data-driven” as fast as many predict, but in time they will all be transformed. 

Whoever controls the digital flows involved can divert much of the rent they generate. 

Knowledge is power in the virtual world even more than in the real one—and it generates profit. Ian Hogarth, a British tech thinker, summarised the sudden sense of urgency when he wrote in a paper in 2018 that “AI policy will become the single most important area of government policy”.

Many rich countries have drawn up ambitious industrial-policy plans for AI. Some have also instituted national data strategies which limit the data that can leave the country. A few have begun attacking other countries’ platforms by hacking their computer systems and spreading misinformation. 

In short, they are behaving increasingly like the companies producing the technology reshaping their world. “Everybody has become much more techno-nationalist,” says Justin Sherman of the Atlantic Council, a think-tank.

That the 21st-century internet would be a splinternet was, perhaps, inevitable. It is not just that nations act in their own interests; they also have different preferences and values, for instance regarding privacy. 

High digital borders behind which data get stuck, however, are not in the interests of most countries—though they may be in the interest of some governments. 

Russia wants to create a “sovereign internet” that can be cut from the rest of the online world at the flip of a switch (while retaining the capability to mess around in more open systems). 

Countries interested in using flows of data to improve their citizens’ lot, though, will see few advantages. In a splinternet world choice will be limited, costs will rise and innovation will slow. And all the while China, with the biggest silo and thus the greatest access to data, loses least.

You’re my best friend

It is against this background that a grand bargain needs to be struck. Its broad outline would be for America to get security guarantees and rule-making bodies in which its interests can be taken seriously. In return it would recognise European privacy and other regulatory concerns as well as demands that tech titans be properly taxed. 

Ideally, such a deal would also include India and other developing countries, which want to make sure that they do not risk becoming mere sources of raw data, while having to pay for the digital intelligence produced.

In terms of security, the parties to the bargain would ensure each other secure, diverse supply chains for digital infrastructure. To get there, the cnas proposes, in effect, to partially mutualise them: among other things, members of a tech alliance should co-ordinate their efforts to restructure supply chains and might set up a semiconductor consortium with facilities around the world. 

Supporting open technologies and standards that create a diverse set of suppliers would help, too. An example is Openran, a mobile network that allows carriers to mix and match components rather than having to buy from one vendor. A world with open infrastructure like this need not, in principle, just depend on a few suppliers, as is the case today with Huawei, Nokia or Ericsson.

To give in to Europe on other fronts in return for help in such matters would be costly to America, which has largely opposed attempts to regulate and tax its tech giants abroad. In terms of statecraft, that is an attractive part of the arrangement; to be willing to pay a cost shows that you place real value on what you are getting.

If an alliance of democracies is to deliver a China-proof technosphere, America will have to accept that the interdependence of the tech world on which the whole idea is based means that it cannot act unconstrained. 

Henry Farrell of Johns Hopkins University argues that America has so far simply “weaponised” this interdependence, using chokepoints where it has leverage to strangle enemies and put pressure on friends. But Europe’s resistance to banning Huawei’s gear and the ECJ’s decision show that even friends can balk. America needs to give if it is to receive.

It might not have to give all that much. European views on regulating platforms more strictly because of their tendency to become quasi-natural monopolies are not exactly mainstream in Washington, DC, but nor are they completely alien to the political debate there. 

A recent congressional report about how to limit big tech’s power included many ideas already touted in Brussels, such as banning tech giants from favouring their own services and refusing to connect to competing ones. 

Positions on regulating speech online are not that far apart either. As in Europe, there is growing agreement in America that legislation is needed to push social-media firms to do more to rid their services of hate speech and the like.

A deal on taxing tech firms seems within reach, too. The Trump administration resisted efforts to compel them to pay taxes where they do business rather than in tax havens, regarding this as a grab for the profits of American companies. A Biden administration is likely to be more open to the argument that more of the taxes on digital firms should go to places where their customers live. 

Expect negotiations on the matter at the oecd to be revived—as they must be to keep countries from charging digital taxes unilaterally. Barring a compromise, France, Spain and Britain will start collecting such a levy early next year.

In parts of the world’s international bureaucracy the grand bargaining has already begun. When Japan presided over the G20, a club of developing and rich countries, last year, it succeeded in getting the group to launch the “Osaka Track”, an attempt to come up with rules to regulate global data flows. 

This summer also saw the launch of the Global Partnership in ai, which is meant to come up with rules for the responsible use of AI, and of the Inter-Parliamentary Alliance on China, which brings together lawmakers from 18 countries. 

These new groups join a few established ones, such as the OECD and the Internet Governance Forum, which have long pushed for common rules in the digital realm. 

NATO has started to do the same for ai and data-sharing among its members.

One of the key parameters in the bargaining will be how formal a framework the parties want. In some ways, formal is better: everyone knows where they stand. In others, formal is worse: agreement is harder. Take the example of trade, thoroughly formalised within the WTO. Trade agreements take years to negotiate, often only to be blocked by legislatures at the last minute. 

This is why a Biden administration will probably aim for a much looser form of co-operation, at least initially. An idea discussed in foreign-policy circles close to Mr Biden is that, instead of agreeing on certain policies that then have to be implemented nationally, governments should opt for a division of labour within certain red lines. 

If Europe wants to go ahead with rules to regulate big tech which do not amount to expropriation, America would not put up a fight—thus allowing the eu regulation to become the global standard of sorts, rather as it has done with the GDPR.

The show must go on

Compromises that provide something for everyone are not hard to spot. But reaching them will not be easy. After four years of President Trump, “the mistrust on the European side runs deep,” says Samm Sacks of CNAS. On the other side of the Atlantic, Congress will not want to make life more difficult for its intelligence agencies, for whom social media and online services have become a crucial source of information. 

In order for a grand bargain to be reached, all of that must be made more difficult. If the ECJ struck down the Privacy Shield, it was mostly because the court believed that America does not provide enough safeguards to protect European data from the eyes of its intelligence and law-enforcement agencies.

Another big barrier on the way to a bargain will be the question of how much America’s tech titans need to be reined in. “To bring globe-spanning technology firms to heel, we need something new: a global alliance that puts democracy first,” argues Marietje Schaake, a former member of the European Parliament who now works for the Cyber Policy Centre at Stanford University, in a recent article. 

Many in California and elsewhere in America like the sound of this, but Congress will only go so far in restricting its tech giants and their business model, which is increasingly based on extracting value from data.

Even if a grand bargain can be reached, many small ones will need to be done as well. 

That is why, in the long run, the world needs more than bilateral deals and a loose form of co-operation, but something more robust and specialised. 

It may even have to be something like a World Data Organisation, as Ian Bremmer of the Eurasia Group has suggested (or at least a GADD, a General Agreement on Data and Digital Infrastructure, a bit like the General Agreement on Tariffs and Trade, as the wto’s predecessor was called). 

Given the sorry state of the wto, this may seem fanciful, but without such an organisation today’s global data flows may shrink to a trickle—much as protectionism limited trade in the days before the GATT and the WTO.

Will it ever happen? Yes, if history is any guide. In July 1944 representatives of 44 countries met in Bretton Woods, New Hampshire, to hash out a new financial order, including the imf and the World Bank. 

Granted, the pandemic is no world war. But, with luck, living through it may provide enough motivation to try again in the digital realm. 

Corporate America’s deal with the Devil

At first, big business wanted Trump. But now he refuses to go

Rana Foroohar 

    © Matt Kenyon

Last week, 30 chief executives of America’s top 100 largest companies hastily came together in an online dawn meeting to discuss President Donald Trump’s unsupported claims that the US election had been “stolen” from him.

The executives were trying to figure out how to best leverage their personal and organisational influence to ensure a peaceful transition of power, a hallmark of the US political system. Some participants felt that worries of a potential coup were overblown. 

Others thought they weren’t. Most just wanted an end to election turmoil. Within days, other groups, like the US Chamber of Commerce, were calling for Mr Trump to stop delaying the transition. Business, as always, hates uncertainty.

Reading the news, I had conflicting feelings. On the one hand, I was glad that business leaders were thinking about the importance of liberal democracy in America and how to defend it. I also couldn’t help but feel that some of the corporate concern was a bit “too little, too late”. 

Most big business trade groups had been supportive of the Trump administration when it was getting ready to pass what turned out to be the largest corporate tax cuts since the George W Bush era.

I also worried that, even if people like me were glad that business elites were finally taking seriously the disruption to the election process and, moreover, were thinking about how to ensure a smooth transition, there were still over 72m people who voted for Mr Trump and some of them might not agree.

I suspect that when those people read about a bunch of multinational CEOs getting together to throw around their political weight, a good chunk of them would likely think something along the lines of: “It’s true! There is a cabal of wealthy and powerful people running the country and they have influence that I don’t. They are the ones thwarting democracy.”

Sadly, they wouldn’t be delusional to think so. Anyone with a pulse knows that in the US today the system is rigged in favour of the wealthy and powerful. One particularly illuminating paper published this month by the Institute for New Economic Thinking quantifies the problem. 

Building on a persuasive 2014 data set, it shows that when opinion shifts among the wealthiest top 10 per cent of the US population, changes in policy become far more likely.

Using AI and machine learning, INET academics Shawn McGuire and Charles Delahunt delved deep into the data. They found that considering the opinions of anyone outside that top 10 per cent was a far less accurate predictor of what happened to government policy. 

The numbers showed that: “not only do ordinary citizens not have uniquely substantial power over policy decisions; they have little or no independent influence on policy at all”.

This, of course, is how we ended up with Mr Trump as president. He wasn’t the cause but the symptom of a pendulum that had swung too far towards corporate concentration, and corruption in both politics and business. We have had decades of legislative tweaks to everything from tax policy to corporate governance and accounting standards that have favoured capital over labour.

Supreme Court decisions such as the Citizens United case have also dramatically increased the amount of money funnelled into political campaigning. This has left the nature of America’s political economy perilously close to an oligopoly.

Look no further than the way in which Uber, Instacart, Lyft and other digital groups this month got their way with Californian labour law. Together they spent $200m to push through Proposition 22, a ballot initiative that exempts many gig workers from benefits. These companies may well now take their efforts to other US states.

As Karl Marx observed, it is only under threat from the masses that the owners of the means of production recognise their common interests. Corporate America got what it wanted from Mr Trump, namely tax cuts and deregulation. Big business in America now knows that there’s nothing more to be got from him. So they are eager for him to go, taking with him those disruptive tweets of which they were sometimes the target.

They are also eager for president-elect Joe Biden to come into office and normalise trade and foreign affairs, as well as deal with the Covid-19 crisis. Mr Trump’s inept handling of the pandemic, now raging again in the US, has been terrible for the economy and for business. CEOs are desperate for Mr Biden to get the situation under control, even if he does roll back their tax cuts.

I believe Mr Trump will eventually go. But the cynicism and anger of many left behind voters who supported him will remain. Business leaders are right to call for the president to respect the election results. But the corporate activism shouldn’t stop there. Rather it should begin.

I’d love to see business work with the Biden administration on a way to build a good national healthcare system similar to what most European nations enjoy. That would benefit individuals such as those gig workers, as well as companies that have to carry the burden of healthcare costs. Or how about engineering a public-private solution to the US’s $1.6tn student debt crisis?

If companies used their power in these ways, they might not have to worry as much about the next Trump.

China Stares Down a Financial Reckoning

Beijing thinks the pandemic illustrated the superiority of its approach to financial stability.

By: Phillip Orchard

One has to wonder what Jack Ma was thinking when, in a speech in Shanghai in late October, the Alibaba and Ant Group founder ripped into overzealous Chinese regulators, accusing them of having a “pawnshop mentality” and stifling innovation. 

Beijing promptly suspended Ant Group’s upcoming initial public offering, which was expected to be the largest in history, costing Ma personally an estimated $3 billion. Days later, Beijing unveiled sweeping new anti-monopoly legislation that will hit much of Ma’s sprawling empire.

That Ma’s comments struck a nerve was not surprising. As Chinese tech conglomerates like Ant Group have rapidly expanded into fintech and financial services, they’ve effectively become lightly regulated banks. And Chinese President Xi Jinping’s administration is obsessed with curbing financial risk. 

Though Beijing needs these companies’ innovations to get liquidity to corners of the economy that the Chinese banking system struggles to service, these inevitably make it more difficult to stave off a cascading financial crisis. When forced to choose between dynamism and stability, Beijing almost always chooses the latter.

Curiously, though, in the weeks that followed Ma’s comments, Beijing mostly sat on its hands when state-owned enterprises (SOEs) across multiple sectors began publicly announcing defaults on corporate bond obligations. Defaults by Chinese state-backed firms are exceedingly rare, given their VIP access to state credit. 

Thus, any hints that SOEs are about to default, or state banks about to fail, tends to push Chinese financial markets to the brink of panic. This came a week after Xi had praised Chinese SOEs as proving themselves even more reliable than their private counterparts in responding to the COVID-19 pandemic, pledging to make them bigger, better and stronger.

The confluence of events speaks volumes about the high-wire path Beijing is walking to stave off a financial reckoning. But it also suggests that Beijing thinks it has found a model of state capitalism that lets it eat its cake and have it too

The Problems

In 2017, Xi elevated financial stability to the level of national security in terms of the Chinese Communist Party’s priorities. There’s a good reason for this fixation: No country in history has amassed so much debt so quickly as China has without succumbing to a financial meltdown, according to the World Bank. 

So long as China’s economy was galloping ahead at double-digit growth, with the corporate sector awash in easy profits to paper over inefficiencies and an immature system for pricing risk, the chances of an uncontrollable financial crisis were low. 

But as the Chinese growth model shifted from one driven by exports and land liberalization to investment, and as gross domestic product growth entered into a long, if gradual, slowdown, the margin for error began to narrow considerably. 

Things became particularly hairy after the 2008 global financial crisis, when Beijing unleashed a staggering amount of stimulus, effectively giving local governments a blank check, and then found itself incapable of scaling back without sending the entire system into a tailspin.

Since 2017, Xi's administration has attempted to implement a suite of ambitious “de-risking” reforms. These have included overhauling the regulatory apparatus, sending the anti-graft authorities after wayward officials and tycoons, and hammering local and provincial governments and banks to clean up their books and eschew “shadow lending” practices. 

It also gave the central bank free rein to tinker endlessly with the system in search of an elusive balance between liquidity and control. But this effort has been bedeviled by two chronic problems, both a result of Beijing’s insistence on maintaining a state-centric system.

One is a distorted banking system that’s heavily incentivized to focus on the needs of China’s more than 150,000 SOEs (the bulk of which are owned by provincial and local governments) and projects that banks suspect will be prioritized by the party – and thus guaranteed not to bust – at the expense of everything else. 

As a result, the system is not particularly good at pricing risk or distributing credit to areas of the economy that don’t have implicit state backing. It’s particularly bad at meeting the needs of households and small and medium-size enterprises, which tend to have scant credit histories or assets available for collateral but which now make up the overwhelming share of employment in China. 

This forces businesses and cash-strapped local governments to seek funding via shadow lending vehicles (the opacity of which makes Beijing nervous) and households to rely on things like peer-to-peer lending platforms (the volatility of which makes Beijing very nervous as a potential source of social upheaval). 

It also created an opening for fintech firms like Ant Group to fill the void in consumer-facing finance.

All this forces regulators to tread carefully when implementing new de-risking measures. Move too far, too fast, and the private sector may face a credit crunch – as it did in 2018 and 2019, even before the pandemic – and China’s cherished growth may grind to a halt. 

Move too slow, and household savings – the great stabilizer and safety net of the Chinese economy – may fall away, speculative real estate bubbles may pop, and any number of interlocking fault lines may rupture at once.

The other core problem is moral hazard. Put simply, given Beijing’s existential fear of unemployment and social unrest, lenders and investors understandably just assume that the state will more often than not come to the rescue if things go sideways and pose any degree of systemic risk. 

Beijing also realizes that if people think that the state is guaranteeing their deposits or investments, and the state doesn't live up to its promise (implicit or otherwise), people are likely to direct their ire not at poorly run banks or companies but at the state itself. Naturally, this encourages all sorts of risky lending and investment activity. This is particularly true with SOEs and state banks. 

Beijing sees such entities as invaluable tools for soaking up surplus employment and funding or carrying out projects prioritized for social development or diplomatic goals, as well as for brokering factional peace and deepening dependence on the party’s goodwill. 

It is willing to tolerate a lack of profit and efficiency in the state sector in service of these ulterior goals. Local governments, meanwhile, rely on the state firms they control to get around regulatory constraints and meet employment and growth targets set from above.

Regulators may grouse about the state sector’s profligate ways, but they’ve generally been unwilling to expose it fully to market forces and leave state banks, in particular, on the hook for losses. 

The handful of times they’ve tried, things have gone badly. The closest China has come to having its own Lehman Brothers moment was in June 2013, for example, when Beijing briefly declined to intervene following a technical default between two small banks. 

This sent interbank lending rates soaring, grinding lending to a halt and sparking a liquidity crisis that began to spread into the rest of the economy. Beijing quickly backed down, and the merry circus continued.

The Solutions

The past month’s events are just the latest iteration of this push and pull between market and state. But, as is usually the case with China, it’s always difficult to discern whether unusual developments are a sign of Beijing’s weakness or strength. 

Does the crackdown on tech conglomerates betray a growing fear in Beijing that their growing wealth and control over data and information (things the Communist Party of China wants to monopolize) will translate into political power and rupture China’s historical regional and socioeconomic fault lines? 

Or is Beijing merely flexing in service of a prudent policy? (Ant Group quickly acquiesced, after all.) Does letting SOEs default suggest that the scale of China’s debt woes is surpassing Beijing’s ability to respond, or has Beijing’s financial de-risking campaign been so successful that it feels it's high time to teach profligate state-owned firms a thing or two about accountability?

In most cases, there’s an element of both. A permanent sense of intertwined crisis and opportunity is the foremost driver of the Communist Party’s behavior. But what’s different this time around is that Beijing appears to truly feel that its measures are working. The pandemic was the ultimate stress test of the Chinese system. 

And the system by and large has emerged unscathed – even stable enough to risk a market panic by letting SOEs fall on their swords or to risk another liquidity crunch by saddling fintech innovations with new regulations. It’s done this without resorting to 2008-style stimulus. 

It’s done this while cracking down on Hong Kong despite the risk of scaring off much-needed foreign investment. It’s done this as the focus of U.S. economic pressure on China has shifted from trade to finance.

Bond Defaults by Chinese Corporates

Number of Chinese Zombie Firms

Indeed, Beijing thinks the pandemic, like the 2008 global financial crisis, has in many ways illustrated the superiority of the Chinese approach to financial stability – or at least what Beijing hopes the system will become, with some additional technocratic tweaking, some purging of corrupt elements and regular injections of party ideology to get everyone marching in the same direction. 

And to be sure, Beijing deserves credit for empowering its regulators to take on painful reforms before the crisis hit and for implementing a countercyclical regulatory system designed to adjust on the fly, tightening and relaxing control as changing conditions demand. 

It can count real successes in curbing shadow lending and shutting down “zombie enterprises” in a relatively controlled manner. What the system lacks in market incentives to act prudently, Beijing has been able to offset, to an extent, by introducing fear of Xi. Perhaps this is one of the benefits of living in constant fear that an existential crisis is just around the corner – you’re far less likely to get caught flat-footed.

The core contradictions embedded in China’s model remain, though. It’s unlikely to ever embrace a cleansing but potentially destabilizing recession. It’s not about to reduce the role of state banks and enterprises. 

It’ll remain enormously difficult to weed out moral hazard altogether, and to persuade financial institutions to act against their own self-interest, so long as it sees a state-centric economy essential for party survival. 

There’s an inevitable trade-off between dynamism and control. Even if this model remains adept at staving off a cataclysmic crisis, a long slowdown will be hard to avoid. 

In other words, China’s financial reckoning probably can't be avoided forever, but it's likely to look a lot more like Japan’s Lost Decades than what was faced by South Korea and much of Southeast Asia during the 1997 Asian financial crisis. 

Given what the consequences of the latter would look like in China, it’ll happily make that trade.

Slow Death or New Direction for the UN?

For most of its 75-year existence, the United Nations has struggled to strike a balance between its lofty founding aspirations and realities on the ground. But in today's fast-changing geopolitical environment, the organization may be facing its biggest challenge yet.

Mark Malloch-Brown

LONDON – For much of its life, the United Nations has hidden behind the comfortable maxim that, “If we didn’t have it, we would have to invent it.” Now at the venerable age of 75 (old enough to have been a 2020 US presidential candidate), the organization still enjoys widespread approval in global opinion polls.

But beneath the surface, the UN faces difficulties that cannot be ignored. Judging by traditional and social media, the issues that the UN pushes tend to get little traction. Worse, when it comes to maintaining peace and security, the UN is often stymied by its dysfunctional Security Council, which itself reflects an increasingly divided world. 

Whether in Syria, Yemen, or Libya, progress toward securing peace has been glacial, with much more being decided on the battlefield than at the Security Council. These same divisions have also hampered human-rights advocacy, as has the recent election that awarded seats on the UN Human Rights Council to Russia, Cuba, and China.

Of course, the UN has always mirrored the world it represents. There was broad member support for a strong UN only in its initial years and during the early years of Kofi Annan’s tenure as secretary-general in the late 1990s. Otherwise, the UN has typically operated against strong headwinds; and now, a number of political and demographic changes are rapidly reshaping the UN’s world.

Today’s world is younger overall. US power appears to have peaked, and the global distribution of power is being redistributed to China and others. At the same time, the COVID-19 pandemic has ensured that the world will be poorer, just as digitalization has made it less equal.

With a charter that rests squarely on the liberal-democratic values of the winners of World War II, the UN has struggled to accommodate the changing global order. Under its current secretary-general, António Guterres, the UN has admirably continued to pursue gender parity and more diversity in its staffing. 

Still, too many top jobs remain in the hands of the founding member states. And, more fundamentally, the organization seems out of touch with the world beyond its doors.

China, the second-largest contributor to the UN’s assessed budget, has increasingly tried to assert global leadership on climate change and other issues, following America’s abdication under outgoing President Donald Trump. 

At the UN General Assembly in September, Chinese President Xi Jinping took an extraordinarily consequential step, pledging that China would become carbon neutral by 2060. Yet the same regime that has committed to environmental sustainability is also brutally persecuting China’s Uighur minority.

This points to the UN’s central dilemma. In terms of population, most of today’s world is under authoritarian rule, ranging from despots without even a pretense of democratic legitimacy to elected autocrats who have eroded democratic institutions and checks on their power.

With no choice but to contend with this increasingly undemocratic world, the UN’s challenge now is to fashion a practical, achievable agenda without betraying its founding charter and its commitment to human rights and other freedoms. It will have to tap into its current strengths. 

As a representative of “collective rights,” the UN is uniquely positioned to mobilize action on issues like climate change, which threatens poor farmers in developing countries as much as it does rich Manhattanites who are exposed to rising sea levels.

Likewise, the 2030 Sustainable Development Goals, which seek to tackle inequality and exclusion everywhere, remain an example of the UN at its best, as does Guterres’s call for “A New Social Contract for a New Era.” 

The UN provides an indispensable global good by producing league tables of human development and organizing broad coalitions to achieve steady progress on key indicators of well-being.

But just because the UN is a leading voice for social, economic, and environmental justice does not mean that it should be given a pass on human rights. The organization has a duty to report human-rights abuses wherever it finds them. Though it should be smart about passing evidence on to others and issuing denunciations, it must remain fearless in its advocacy. 

Here, its best allies are civil-society groups and the few brave countries that are willing to defy narrow commercial or political interests to take on the likes of China, India, or Saudi Arabia.

By contrast, the UN probably will have to bow to the logic of the twenty-first-century cold war. The Security Council will remain ineffectual until it is reformed, which is a distant prospect. But there are ways around this paralysis. During the original Cold War, the UN, without reference to the Security Council, launched major initiatives to address humanitarian crises and to support new members emerging from colonial rule. 

UN development and humanitarian agencies often drew on their own mandates and international law to intervene when the circumstances required it.

Today, UN Special Representatives in conflict areas and UN Resident Coordinators elsewhere do much unsung good, working tirelessly behind the scenes to avert local conflicts, defend civil society, and address inequality and other root causes of political instability. This field-based UN thrives out of sight and out of mind, safely removed from the obstructive state-driven politics of the Security Council in New York City.

It is here that the UN’s future will be secured or lost. In a younger, angrier, increasingly impatient world, a distant club of men in dark suits is doomed to irrelevance. Where the UN matters is on the ground, deploying its remarkable mandate to fight for those who need it most.

Mark Malloch-Brown, a former deputy United Nations secretary-general, is Co-Chair of the UN Foundation.