A transatlantic effort to take on Big Tech

The monopoly power of the sector has grown during the pandemic

Rana Foroohar 

                                                                                                                                   © Matt Kenyon

Opportunities and challenges are often one and the same. So it is at the moment with the US and Europe.

The European Commission wants to grab a “once-in-a-generation” opportunity to reset the transatlantic relationship now that US president Donald Trump is on his way out. President-elect Joe Biden’s administration will want a partnership with Europe to be at the heart of a reinvigorated alliance of liberal democracies that will present an economic and political alternative to China.

However, the 27-nation EU and the US continue to be at war with each other over technology regulation, trade and corporate taxation. Brussels is right that it is time for a reset. But getting there will require thinking about these issues all together, rather than in silos.

Start with tech regulation. The commission is considering new legislation that would take on the most entrenched Big Tech firms, such as Facebook and Google. The idea is to correct the failures of existing antitrust legislation, since competition policy focused on consumer pricing is not built for the era of digital barter. The US Department of Justice’s Google case may begin to shift that, but it will take years to complete.

The commission’s proposals, which would be subject to the approval of EU governments, would define the role and responsibilities of digital “gatekeepers”. They would force them to make their systems more open and interoperable, subject them to algorithmic audits and impose sanctions, such as the divesting of assets, for repeat offenders. 

Silicon Valley is already lobbying hard against the proposals. Companies are counting on the incoming Biden administration, which will include a number of tech-friendly officials from Barack Obama’s time in the White House, to help them stand up to Europe. 

It shouldn’t. One of the huge risks for the new administration is that it will be seen as too cosy with concentrated corporate power. Witness the cries already coming from the left about some of Mr Biden’s appointees who have backgrounds in private equity. 

Individual appointees should be judged on their own merits. If we didn’t let anyone from either the finance or the technology industries into the new administration, we would be the poorer for it. Take Gary Gensler, a former Goldman Sachs executive, who is now Mr Biden’s chief markets adviser. He cleaned up derivatives trading while at the Commodity Futures Trading Commission during the Obama years.

That said, this is a crucial moment for the new president to send a signal about how he plans to control Big Tech as an industry — or not. European regulation is not perfect, but it is far better than what the US, with the exception of California, has right now, which isn’t much.

Each side needs a swift agreement on how to regulate cross-border data flows, given that digital trade is the only sort that is expanding. The European proposals overlap with the DoJ’s antitrust case in that they both focus on how big platforms can trap customers into choosing their own products and services — an argument Google contests. 

This should be the start for a new transatlantic approach to curbing the monopoly power of the sector, which has only grown during the pandemic.

It could also be part of the west’s response to China’s digital surveillance state. It makes perfect sense for the US and the EU to create a shared set of standards for 5G and the internet of things, which will massively increase the depth and breadth of digital data over the next few years, using homegrown equipment from companies such as Qualcomm, Nokia and Ericsson. 

China plans to be free of foreign technology and supply chains by 2035. It is time that the US and Europe created their own digital alliance.

It must be a diverse one. As we move from the consumer to the industrial internet, Europe, as a huge producer of potentially “smart” devices such as white goods and automobiles, has much to gain — but also to lose. 

For example, it is easy to imagine Google’s Nest division owning much of the data generated by a German washing machine or a French refrigerator, without the data sharing and portability that is a core element of the new EU proposals.

While the new rules are geared more towards the consumer internet, the EU’s policymakers are studying the internet of things and plan to put out a report on consumer-facing IoT by the middle of next year. European companies such as Siemens and SAP have a leg up when it comes to the business-to-business industrial internet.

Still, I would love to see any future digital competition solutions include public data banks in which anonymised personal and industrial data are shared, with independent oversight. It would be a way to ensure that companies of all sizes, as well as researchers and academics, could have equal access to data.

No less welcome would be a transatlantic agreement about how to tax data extractors — be they platforms, fintech firms or French luxury handbag makers. The public sector needs the revenue. And the Biden administration can’t afford to be as cosy with Silicon Valley as the last Democratic administration was.

The perception that the Democrats sold out to corporate interests is one of the reasons we got Mr Trump. Resetting trust in the public sector must also be an end goal for any new transatlantic relationship.

The Infrastructure Spending Challenge

Macroeconomists broadly agree that productive infrastructure spending is welcome after a deep recession, especially when interest rates are at record lows. But in advanced economies, any new project typically requires navigating difficult right-of-way issues, environmental concerns, and objections from apprehensive citizens.

Kenneth Rogoff

CAMBRIDGE – Encouraging news about more effective anti-viral treatments and promising vaccines is fueling cautious optimism that rich countries, at least, could tame the COVID-19 pandemic by the end of 2021. 

For now, though, as a brutal second wave cascades around the world, broad and robust relief remains essential. Governments should allow public debt to rise further to mitigate the catastrophe, even if there are longer-term costs. 

But where will new growth, already tepid in advanced economies before the pandemic, come from?

Macroeconomists of all stripes broadly agree that productive infrastructure spending is welcome after a deep recession. I have long shared that view, at least for genuinely productive projects. 

Yet, infrastructure spending in advanced economies has been declining intermittently for decades. (China, which is at a very different stage of development, is of course another story entirely.) 

The United States, for example, spent only 2.3% of GDP ($441 billion) on transportation and water infrastructure in 2017, a lower share than at any time since the mid-1950s.

Perhaps this reluctance to embrace infrastructure investment is about to fade. US President-elect Joe Biden has pledged to make it a priority, with a strong emphasis on sustainability and combating climate change. 

The European Union’s proposed €1.8 trillion ($2.2 trillion) stimulus package – comprising the new €1.15 trillion seven-year budget and the €750 billion Next Generation EU recovery fund – has a major infrastructure component, particularly benefiting the economically weaker southern member states. 

And the United Kingdom’s chancellor of the exchequer, Rishi Sunak, has set out an ambitious £100 billion ($133 billion) infrastructure initiative, including the establishment of a new national infrastructure bank.

Given many countries’ decaying infrastructure and record-low borrowing costs, all this seems very promising. But, after the 2008 financial crisis, macroeconomists universally regarded the case for infrastructure spending as particularly compelling, too, and the experience then counsels caution about assuming a significant boost to long-term growth this time around. 

Microeconomists, who look at infrastructure costs and benefits on a project-by-project basis, have long been more circumspect.

For one thing, as the late economist and former US Federal Reserve Board governor Edward Gramlich noted a quarter-century ago, most developed countries have already built the high-return infrastructure projects, from interstate roads and bridges to sewer systems. 

Although I don’t find this argument entirely convincing – there seems to be vast unrealized potential to improve the electricity grid, provide universal Internet access, decarbonize the economy, and bring education into the twenty-first century – macroeconomists should not be so quick to dismiss it.

Gramlich’s argument has strong parallels to Robert J. Gordon’s thesis that the burst of productive new ideas that spawned massive growth in the nineteenth and twentieth centuries has been running out of steam since the 1970s. Some leading macroeconomists, including the public-finance expert Valerie Ramey, think it is far from obvious that the US has a sub-optimal level of public capital.

True, the American Society of Civil Engineers in 2017 awarded US infrastructure an overall D+ grade. But to the extent that this unfavorable assessment reflects reality, it probably stems more from underinvestment in maintenance and repair – particularly of bridges – than from a failure to build, say, a high-speed rail link between Los Angeles and San Francisco. 

In fact, public-finance specialists largely agree that, in advanced economies, maintenance and repair offers the highest return from infrastructure investment. (This is far from the case in emerging-market economies, where a burgeoning middle class devotes a substantial share of its income to transportation.)

Even beyond technological feasibility and desirability, perhaps the biggest obstacle to improving infrastructure in advanced economies is that any new project typically requires navigating difficult right-of-way issues, environmental concerns, and objections from apprehensive citizens representing a variety of interests.

The “Big Dig” highway project in my hometown of Boston, Massachusetts was famously one of the most expensive infrastructure projects in US history. The scheme was originally projected to cost $2.6 billion, but the final tab swelled to more than $15 billion, by some estimates, over the 16 years of construction. 

This was less the result of corruption than of underestimating various interest groups’ bargaining power. Police required substantial overtime payments, affected neighborhoods demanded soundproofing and side payments, and pressure to create jobs led to overstaffing.

The construction of New York City’s Second Avenue Subway was a similar experience, albeit on a slightly smaller scale. In Germany, the new Berlin Brandenburg Airport recently opened nine years behind schedule and at three times the initial estimated cost.

All of these projects may still be good value, but the pattern of cost overruns they highlight should temper the view that any infrastructure project must be a winner in an era of very low rates. Moreover, an ill-considered infrastructure investment might create longer-term costs, from environmental damage to excessive maintenance requirements.

The case for increasing infrastructure spending in today’s low-interest-rate environment is still compelling, but considerable technocratic expertise will be needed to help compare projects and give realistic cost assessments. 

Creating a UK-style national infrastructure bank (an idea former US President Barack Obama had proposed) is one sensible approach. 

Absent that, the recent burst in infrastructure enthusiasm is likely to be a missed opportunity.

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.

Inflation Is Back, Big-Time


The conventional view of inflation is that it’s not only low, but dangerously low and in need of aggressive stimulus.

But that view is becoming increasingly hard to defend, given all the things that are soaring in price. Consider:

The above charts show the price action in industrial commodities that, while not something individual consumers tend to buy (and therefore not part of the official “cost of living”) do affect the price of consumer goods. In other words, when they go up, so eventually do the prices of cars, TVs and buildings.

Speaking of buildings, the next chart shows US home prices – which have been rising steadily since the bottom of the last recession – steepening this year. Note the upward inflection at the right of the chart. Home prices are now higher than they were during the previous decade’s housing bubble, and they’re accelerating.

And last but not least, the US dollar – whose rate of decline is the official definition of inflation – has begun to fall versus not just real things but even against the other crappy fiat currencies.

Add it all up and today’s world has emphatically stopped looking deflationary or even disinflationary. 

Price increases have morphed from isolated to wide-spread, and it’s just a matter of time before people start to notice and act accordingly.

‘The Great Demographic Reversal’ Review: The Perils of Aging

As workers become fewer in number and global wages rise, we may see less inequality but more inflation and higher interest rates.

By William White

Mountains are thrown up by colliding tectonic plates, but the forces at work in their creation are hidden from view and were, for a time, ill-understood. In advanced societies in recent decades, we have seen striking changes in work, investment and income distribution, yet central bankers and ministers of finance, among others, have failed to grasp the underlying forces that brought them about. 

In “The Great Demographic Reversal,” Charles Goodhart and Manoj Pradhan, both Britain-based economists, vividly document past demographic changes, along with their broad effects, and outline the strikingly different changes that, in their view, are soon to come. Not only is their book well argued, but it is bold as well. It defies the conventional wisdom that inflation will not be a problem in the near future.

The authors begin by focusing on a critical event: the opening up of an urbanizing China—as well of other, smaller countries, especially in Asia and Eastern Europe—and the insertion of many millions of low-paid workers into the global trading system. 

This increased workforce sharply increased the production of goods and services, which put downward pressure on global prices. 

But the wages of workers in advanced countries fell even more as employers moved production offshore or made credible threat to do so. Unskilled and semi-skilled workers bore the brunt of the wage shift, and income inequality rose accordingly.

The ramifications of this positive supply shock, as Messrs. Goodhart and Pradhan show, were wide-ranging. With domestic wages flattened or lowered, and offshore investment beckoning, domestic investment in new plant and equipment stagnated, and income was distributed ever more unequally. 

The combination of rising global supply and falling domestic demand also had financial effects: With inflation suppressed, interest rates fell to historic lows. This is the world we see around us now. 

In the U.S., at the moment, the 10-year Treasury yield is less than 1%; the European Central Bank charges commercial banks for holding deposits with it; and there are now around $17 trillion of bonds world-wide offering a negative rate of return.

As convincing as their portrait of past trends may be, Messrs. Goodhart and Pradhan, in “The Great Demographic Reversal,” are intent on arguing that things are going to change again. Indeed, they note that the new trends are already becoming evident. 

Urbanization in China is slowing, and its working-age population is shrinking. In advanced countries, the ratio of “dependents” to workers is rising sharply as baby boomers retire. 

Retirees are not only living longer but are increasingly prone to dementia at older ages. 

As the need for caregivers intensifies, there will be fewer workers available for other work.

A rising dependency ratio, Messrs. Goodhart and Pradhan explain, is inherently inflationary, since “dependents” consume but do not produce. Meanwhile, workers are likely to consume more as a shortage of labor pushes up wages, and investment will rise in advanced countries as companies substitute capital for more expensive labor. 

In short, demand will rise even as supply potential falls. While new technology could increase productivity enough to offset the shortage of workers, the authors (quoting conflicting views by respected experts) refuse to assume that it will.

Extrapolating from these prospective developments, Messrs. Goodhart and Pradhan foresee income inequality narrowing—and inflation and interest rates going up. To some, like poorer workers and soon-to-retire savers, these shifts will obviously be good news. 

But they could well cause severe problems for governments as well as for agents in the private sector that, under the influence of low interest rates, have taken on outsize debt. Messrs. 

Goodhart and Pradhan ponder various approaches to a debt overhang without endorsing any one policy: e.g., debt restructuring and, for governments, higher or new taxes (e.g., taxes on land and carbon). It’s hard not to conclude that the authors expect inflation to be a significant part of the solution, since it is easier to pay back loans in dollars that are worth less.

Undoubtedly “The Great Demographic Reversal” identifies crucial if overlooked forces that may lead to an inflationary future and higher interest rates. But there are other forces at work to which the authors might have given more attention. 

A complementary narrative might emphasize, for instance, the role of central banks. 

They have helped to bring us to our current state, by an excessive reliance on monetary stimulus and debt expansion, and their future policies might yet lead us into a world quite different from the one that Messrs. Goodhart and Pradhan project.

In recent years, central banks, instead of letting prices fall “naturally” in response to demographic shifts, have resisted such a price decline with ever more aggressive monetary expansion. Moreover, the resulting borrowing has gone toward consumption more than productive investments. 

Debt, both public and private, had hit record high levels even before the pandemic and had been recognized as a “headwind” constraining economic expansion. The economic effects of the pandemic had to be met with still more expansion, adding to the debt-overhang problem. 

Worse, easy money and easy access to credit can, over time, threaten the stability of the financial sector as the “search for yield” draws investors to riskier creditors. Should these conditions culminate in another financial crisis, a debt-deflation spiral might follow—not inflation.

Even if Messrs. Goodhart and Pradhan are right to predict an inflationary future, inflation might hit much higher levels than the authors suggest. Indeed, history shows that high inflation is a common outcome when large government deficits are increasingly financed—as they are now—by central banks. 

Still, “The Great Demographic Reversal” provides an instructive glimpse of a possible future and a reminder of the forces that have brought us to this point. 

No one can say we haven’t been warned.

Mr. White, a senior fellow at the C.D. Howe Institute in Toronto, was formerly the economic adviser at the Bank for International Settlements in Basel, Switzerland.