Collusion and collisions

The new rules of competition in the technology industry

Tech giants’ fiefs are no longer quite as safe as they used to be



Technology companies exhibit a curious lexical property. 

Google and Zoom are verbs. 

So, in Chinese, is Taobao, the name of Alibaba’s vast e-mall. 

Uber and Didi, its Chinese ride-hailing rival, are synonyms for “cab”. 

Facebook means, simply, the internet in Vietnam, where people mostly access the web through its social networks. 

Amazon, Apple, Microsoft and Netflix are not literally bywords for, respectively, online shopping, smartphones, office software and video-streaming—but they might as well be.

To tech’s critics, these definitional regularities point to something insidious, encapsulating in a word the dominance that each firm wields over its digital fief—some of it possibly ill-gotten. 

In December American trustbusters sued Facebook for alleged anticompetitive behaviour, and Chinese ones launched an investigation into Alibaba. 

The central plank of one of three antitrust cases against Google is an agreement under which it pays Apple between $8bn and $12bn a year—about a fifth of Apple’s global profits—for its search engine to appear as the default on Apple devices. 

Google also allegedly offered Facebook a sweetheart deal not to support a rival ad system backed by news publishers.

Efforts to sever the linguistic links are multiplying. 

Epic Games, a video-game company that claims Apple is fleecing developers of apps in its App Store, has lodged complaints against it in America and Europe. 

On February 22nd Britain’s competition watchdog warned of looming antitrust actions against big tech. 

The European Union is working on regulations to check the firms’ power. 

Australia has just passed a law that would force them to pay publishers more for news displayed alongside search results or social-media feeds.

From the outside, then, the industry leaves an impression of a cosy club, whose members stay out of each other’s way—or worse, help one another perpetuate their monopolies. And the giants are only becoming more powerful. 

Last year the world’s ten biggest digital firms by market value raked in net profits of $261bn, as people depended on them for socially distant work, play, shopping and socialising. 

Their combined market capitalisation swelled by $3.9trn—more than the entire British stockmarket’s worth—implying that investors expect them to gain further clout.

Big tech sees things differently. 

Alibaba, Apple, Google and Facebook say their various arrangements are perfectly legitimate. 

The American firms co-operate, it is true, but only in order to ensure interoperability between their products. 

In fact, all tech titans insist, their relationships are for the most part not chummy but fiercely combative. 

Brad Smith, president of Microsoft, puts the balance of competition versus co-operation at “80:20” in favour of rivalry. 

Mark Zuckerberg, Facebook’s chief executive, recently called Apple “one of our biggest competitors”. 

“We feel like every day we wake up, we are under incredible competitive pressure,” says Apple.

In recent weeks big tech has certainly seen more barbs than bonhomie. 

Facebook has run ads attacking Apple over new iPhone privacy settings that would ask users if they wanted to opt out of being tracked across other firms’ apps and websites—which, in Facebook’s telling, would hurt small businesses that need it to reach customers. 

For his part Tim Cook, Apple's boss, has been hinting that Facebook is playing fast and loose with users’ data.

On February 22nd Microsoft teamed up with European news publishers to develop a system similar to the one Google and Facebook had objected to in Australia. 

When this month Microsoft first expressed support for the Australian scheme, Google shot back that “of course [Microsoft would] be eager to impose an unworkable levy on a rival and increase their market share,” referring to Microsoft’s Bing search engine.

The fighting talk reflects a growing sense within the technology industry that incumbents are under assault. 

Though dominant firms remain powerful, and occasionally collegial, in one digital market after another challengers are gaining ground. 

Old-industry champions are at last getting their digital act together, as Walmart is doing in online retail and Disney in streaming. 

Less-big tech, such as Shopify in e-commerce or Salesforce in the cloud and business software, is also in encroachment mode. 

A flood of capital pouring into startups could easily translate into even more competition. 

Most significantly, tech’s mightiest titans are increasingly stomping on each other’s turf.

A defining moment

On this view, the era of winner-takes-all land grabs is fading, as tech enters a new, more competitive phase. 

If so, the industry’s lexicon may be about to get considerably more complicated.

The shift is furthest along in China. 

Its two biggest digital groups, Alibaba and Tencent, already compete with each other—and with up-and-coming rivals—across a variety of markets. 

Alibaba’s share of Chinese e-commerce peaked in 2013 at 62%, according to clsa, a broker. Last year it was 51% (see chart 1). 

Once-fragmented competition is consolidating. 

The next two biggest firms, Pinduoduo and jd.com, an e-emporium backed by Tencent, have captured 24% of the market between them. 

They could reach 33% by 2026, reckons clsa. 

Tencent’s WeChat Pay and Alibaba’s Alipay have long vied to be Chinese shoppers’ digital wallets. 

Last year Tencent announced it will invest 500bn yuan ($70bn) over five years, a slug of it to catch up with Alibaba in cloud computing.



America’s tech landscape is beginning to change, too. 

The Economist has looked at 11 big technology markets in America which last year generated combined gross revenue of $1.6trn. 

According to our calculations, which inevitably involved some guesswork, over the past five years the top firm’s share has plateaued in app stores, business software, cloud computing and online advertising. 

It has fallen by double digits in food delivery, ride-hailing and video-streaming since 2015.

In most markets, even where the incumbent’s share edged up, as it has in e-commerce and smartphones, the aggregate share of the next two biggest challengers rose faster (see chart 2). 

In six of the 11 areas the two runners-up now account for a third or more of the market, up from two areas in 2016. 

Stragglers outside the top three are being left in the dust.



Some of the up-and-comers hail from beyond big tech’s homes in Silicon Valley and Seattle. 

Disney’s new streaming service has signed up 95m subscribers globally since its launch in late 2019, reaching that number nearly ten times faster than Netflix did. 

Walmart’s years of investment in online fulfilment began to pay off in the pandemic. 

Other bricks-and-mortar retailers such as Best Buy, Home Depot and Target have also upped their digital game. 

Shopify, a 14-year-old Canadian firm, now controls a tenth of the American e-commerce market, up from one-70th in 2015. Its market capitalisation has risen seven-fold in the past two years, to $150bn.

Perhaps the most salient feature of the new grammar of competition is the growing overlap between America’s five tech behemoths. 

Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft are beginning to echo, on an even grander scale, the rivalry between Alibaba and Tencent. 

James Anderson of Baillie Gifford, a large asset manager that invests in tech firms around the world, does not yet see the “fight-it-out-on-the-beaches spirit” of the Chinese titans. 

But as Mark Shmulik of Bernstein, a broker, puts it, in a nod to the Boolean algebra that underpins modern computing, big tech is moving from the disjunctive world of “or” to the conjunctive world of “and”.

To be sure, the companies have an interest in ensuring their systems work seamlessly together. 

Demand for iPhones is encouraged by consumers’ desire to access Google’s search engine and Gmail, or Facebook’s social networks. 

Cheap cloud computing provided by Amazon translates into more apps for Apple’s App Store. 

Amazon is one of Google’s biggest advertisers. Microsoft licenses Android for its Surface Duo smartphone.

The quintet’s senior executives and cleverest clogs also know and, recent sniping notwithstanding, mostly respect each other. 

When Satya Nadella took over as Microsoft’s chief executive in 2014, he binned a pro-privacy ad campaign alleging that Google scanned emails to serve targeted adverts. 

According to Microsoft insiders his friendships among Google engineers probably played a role in his decision. 

Mr Nadella also decided to stop trying to out-Google Google in search.

The etymology of competition

A lot of earlier incursions big tech firms made against each other ended in tears. 

In the early 2010s all the big companies tried getting into device-making; remember Amazon’s Fire Phone? 

Microsoft’s Zune music player was no iPod and Bing is no verb. Many iPhone users navigate with Google Maps, not Apple’s unloved alternative. 

Facebook Gifts, the social network’s early foray into e-commerce, proved about as welcome as yet another pair of socks.

Indeed, the five American giants continue to derive the bulk of their revenues and, for the most part, profits from the businesses which made them into trillion- or near-trillion-dollar companies. 

Last year online ads generated 80% of sales at Alphabet and 98% at Facebook. Fully 80% of Apple’s revenues in 2020 came courtesy of its sleek devices (chiefly iPhones). 

Microsoft continues to rely on business software for a large chunk of revenues, and Amazon on its online emporium, though most of its (comparatively meagre) profits were generated by its cloud-computing arm, Amazon Web Services (aws).

However, these figures used to be higher. 

With the number of first-time iPhone buyers declining, Apple has reduced its reliance on iPhones, iPads and Mac computers by moving into payments, finance and entertainment. 

The proportion of total revenue from services, at 20%, is double the share five years ago. 

Some of them, such as video- or music-streaming, compete with Amazon Prime Video and Prime Music, as well as with dedicated providers such as Netflix and Disney (for video) or Spotify (for audio). 

Amazon’s revenue share from e-commerce has declined from 87% in 2015 to 72%; a tenth of sales now comes from the cloud and 6% from digital advertising. 

The proportion that Alphabet got from advertising last year was ten percentage points lower than it was in 2015.

Those percentage points relinquished by the core are instead coming from an ever wider array of new ventures. 

Many involve the big five getting in each other’s way. 

Nearly two-fifths of their revenues now come from areas where their businesses overlap, up from a fifth in 2015 (see chart 3). 

If you split tech into 20 or so business areas, from smartphones and smart speakers to messaging and videoconferencing, each giant is present in most of them, according to Bernstein.




Many of these endeavours have yet to make much money. 

But the giants’ stratospheric stockmarket valuations—of between 25 and 82 times annual earnings—require ambitious growth plans. 

As their main businesses mature and slow, they must seek fresh sources of growth somewhere else. 

With trustbusters on high alert, snapping up startup rivals—or otherwise neutralising them—is getting harder, says a Silicon Valley venture capitalist. 

“Growth might depend on competing through homegrown efforts in known big markets.”

The mutual toe-treading that ensues takes several forms. 

First, the companies are increasingly selling the same products or services. 

Second, they are providing similar products and services on the back of different business models, for example giving away things that a rival charges for (or vice versa, charging for a service that a competitor offers in exchange for user data sold to advertisers). 

Third, they are eyeing the same nascent markets, such as artificial intelligence (ai) or self-driving cars.

Direct competition is fiercest in the cloud, a $63bn business expanding at an annual rate of 40%, which Wall Street expects to become a $1trn one within a decade or two. 

Jeff Bezos, Amazon’s boss, once joked that Barnes & Noble understood within months it had to copy Amazon’s Kindle e-reader but it took his genius techie rivals years to twig they should ape aws. 

They got there in the end.

Microsoft’s 11-year-old Azure cloud-computing division rakes in an estimated $20bn a year in revenue. 

Bernstein expects cloud-computing to make up 12% of Google’s revenues by 2024, up from 7% in 2020. 

Acknowledging the unit’s importance, in January Google broke out the operating results of its cloud business (which lost $5.6bn in 2020).

E-commerce, which the pandemic has turbocharged, is another area being contested. Facebook has had a second-hand goods market called Marketplace for a while. 

In May it launched Facebook Shops to take Amazon on more directly, giving the 160m or so businesses which already use the social network or its sister app, Instagram, as a shop window a way to sell their products. 

Facebook and Google are also both working with Shopify, whose merchants flog theirs on their platforms. 

Even Microsoft is eyeing retail, albeit by a more circuitous route, with plans to sell automated checkout technology to Walmart.

Social media—Facebook’s bread and butter—are likewise in rivals’ sights. 

Last year Microsoft hoped to beef up its consumer business, which includes Surface tablets and the Xbox video-game console, by buying TikTok, a Chinese-owned short-video app. 

This year it considered acquiring Pinterest, a photo-sharing network. 

Neither deal came to pass, but it was a clear statement of Microsoft’s intent.

Amazon, too, “would be crazy” not to look at social media, says an executive close to it. 

In 2013 it bought Goodreads, a platform where people rate books and find recommendations, which has been described as “Facebook with books”. 

The millions who rate purchases on Amazon’s online-shopping platform constitute a germ of a possible future social network. 

A former Amazon executive wagers that “it will be easier for Amazon to go into social than for Facebook to move into shopping,” because the logistics of delivery, which Amazon has mastered, are trickier to bootstrap than a social network.

Then there is search. 

Microsoft, emboldened by its cloud success, could start investing more in the decent but marginal Bing. 

Amazon has concluded that if merchants on its e-commerce platform want to flaunt their wares to online shoppers, why let Google make all the money? 

Its search-ad business remains a fraction of Google’s. 

But these days most product searches begin in Amazon’s app or on its website.

Apple, too, harbours search ambitions. 

In 2018 it poached John Giannandrea, Google’s head of search and ai. 

People have noticed that Applebot, a web crawler, has become more active of late, presumably gobbling up data on which to train. 

Siri, Apple’s voice assistant, “is basically a search engine”, says one tech insider. 

Apple could, he adds, “skim the cream” by answering the most valuable queries—those by well-heeled iPhone users.

Unlike Amazon, which competes with Google head-on for advertising dollars, Apple seems unlikely to want to profit from search-advertising directly. 

Instead, its search project may be aimed at luring the privacy-conscious deeper into the safety of its “walled garden”—much to Mr Zuckerberg’s understandable chagrin.

This illustrates the second sort of competitive behaviour. 

Undermining Google’s or Facebook’s business model may not be the explicit aim of Mr Cook. 

It nevertheless forces his advertising-dependent opposite numbers, Mr Zuckerberg and Alphabet’s Sundar Pichai, to come up with services and product that would persuade users to respond “yes” to the tracking question.

Mr Pichai, for his part, is doing something similar by giving away all manner of products, from cloud-based word processors, spreadsheets and Hangouts video chat to TensorFlow, Alphabet’s machine-learning software, and Kubernetes, a cloud-computing project. 

Some observers see these giveaways, bankrolled by Google’s ad dollars, as an attempt to create a perfectly competitive profit desert that rivals have no incentive to enter—leaving Google with a Sahara’s worth of data.

Rather than electing to enter new technology niches, the companies are being dragged in, often by their users. 

As Amazon sees it, according to a former executive, the internet and copious amounts of data mean if you are in one business, you simply have to get into the one over the fence. E-commerce and social media offer a good example. 

“Social shopping”, where retailers organise mass virtual sprees for buyers on social media, are all the rage in China and may soon be in the West.

Thanks to customer bases in the hundreds of millions or billions, technology platforms can diversify easily and cheaply. 

Facebook’s Marketplace, for one, started after the company spotted large numbers of people buying and selling various things in Facebook groups, notes Javier Olivan, who oversees the company’s core products.

This process looks likely to intensify as the firms shift from looking over the others’ shoulders to gazing ahead. 

Often they end up staring in the same direction: towards data and ai. Four of the giants already offer digital assistants, which they would love to become consumers’ primary gateway to the internet. 

Everyone is also hungrily eyeing payments, especially in light of the recent success of PayPal, which has been gaining clout at the expense of Visa and Mastercard.

Big tech is pouring billions into ambitious ai projects. 

Apple has been in talks with several carmakers to build a self-driving car, which within the tech quintet has hitherto been the preserve of Waymo, an Alphabet subsidiary. 

Nothing has materialised but the idea of an Apple car is almost certainly here to stay. 

Last year Amazon bought Zoox, a self-driving startup. 

Alibaba and Baidu, a Chinese search engine, are also both interested in cars.

Not everything has improved. 

There is still scant competition in handsets. 

The two dominant mobile operating systems, Google’s Android and Apple’s ios, remain a duopoly. 

So do their app stores. 

The online advertising market looks more competitive overall, but it is unclear if Amazon is really playing in the same sandbox as Google in search, or whether TikTok is a direct rival to Facebook in social media.

The tech giants have also become adept at playing the antitrust referees to keep potential competitors busy defending their core businesses from regulators, and thus less able to encroach on other markets. 

“Everyone is desperate to say it’s not me, it’s the guy over there,” says a tech executive. 

Microsoft got the antitrust ball rolling against Google in the late 2000s by building a coalition of companies against its dominance of search. 

Members of that coalition such as Yelp, a local search and reviewing site, are once again agitating against Google, leading insiders to chortle about how Microsoft “sleeper cells” have come to life.

Lina Khan of Columbia Law School, who was legal counsel for a congressional committee that investigated big tech, says that the giants are skirmishing in some areas, like the cloud and voice assistants. 

But still, she says, they are not battling over core territory, and, what is more, describing this as a fight risks overlooking the broader ways in which the firms mutually benefit from their collective dominance.

New coinage

If the skirmishes intensify, that could lead to lower profitability for the tech companies. 

Margins in cloud computing, where competition is most pronounced, are already tightening. 

According to Mr Anderson of Baillie Gifford, Google’s tilt at the aws/Azure quasi-duopoly has pushed down prices. 

Tencent’s cloud investments are likely to add pressure.

Alphabet’s operating margins have declined by 13 percentage points over the past ten years. 

Even Apple’s are ten percentage points below their peak in 2012. 

Those of Facebook have come down from a lofty 50% in 2017 to less than 40%. 

The companies mostly keep mum about how their individual businesses are doing. 

But one possible explanation for slimmer overall margins is greater competition. 

Another is that entry into new markets eats into profits from core businesses. This could eventually put pressure on rivals also present in those markets.

The presumption that the tech giants are either colluding to divvy up the planet's digital pie or carefully steering clear of each other is no longer right. 

Many people would of course prefer to see more than a handful of firms slug it out for the modern economy’s critical digital markets. 

Still, so long as they truly are slugging it out, that is good news for everyone else. 

How Can Biden Bring Back Manufacturing Jobs? Weaken the Dollar

Critics of a strong currency say it hurts American factory workers by making imports cheap.

By Noam Scheiber




President Biden has made reviving American manufacturing a top priority. 

To deliver, he may first have to deal with something even more fundamental to the U.S. economy: the strength of the dollar.

Because a strong dollar lowers the price of imports and raises the price of exports, it gives foreign companies an advantage over American competitors and can drag down U.S. employment.

“Dollar overvaluation is the big problem,” said Mike Stumo, chief executive of the Coalition for a Prosperous America, which represents small and midsize manufacturers and farmers. Mr. Stumo describes policies that prop up the dollar as a “war on the working class.”

Few recent presidents have devoted much attention to this issue. Donald J. Trump fulminated against the decline of U.S. manufacturing and occasionally mused about weakening the dollar, but focused his policies more on tariffs than on currency.

But Mr. Biden has hired a handful of senior economic advisers who are concerned about the dollar’s strength and have explored ways to reduce it.

“There are a lot of folks who want to try some new things in there,” said Mr. Stumo, whose group presented ideas for weakening the dollar to three of Mr. Biden’s agency transition teams.

The dollar’s strength over much of the past few decades has bloated the U.S. trade deficit, which roughly tripled as a share of gross domestic product in the late 1990s and has remained high.

At its simplest level, the trade deficit represents a kind of leakage from the U.S. economy: Americans buy more in goods and services from abroad than the rest of the world buys from the United States, and the country takes on foreign debt to pay for the difference. 

If Americans bought more domestically made products and fewer imports, the spending would create jobs for U.S.-based workers and require less debt.

Traditionally, most economists have nonetheless taken a blasé posture toward trade deficits, arguing that they reflect underlying economic fundamentals — namely, a country’s appetite to consume or invest rather than save.

A country with a young population may run a large trade deficit because young workers tend to consume more than older workers, who are focused on saving for retirement. 

An economy growing unusually quickly can also run a larger-than-usual trade deficit, as spending spikes for goods like cars and phones.

The problem for the United States is that its trade deficit appears to be far larger than demographics and other fundamentals would predict. 

According to an analysis by the International Monetary Fund, a reasonable current account deficit, a somewhat broader measure of the trade deficit, would have been about 0.7 percent of the $21 trillion U.S. economy in 2019. 

The actual deficit, adjusted for short-term factors like the strength of the economy, was about 2 percent of gross domestic product — larger by hundreds of billions of dollars.

This divergence between economic models and the actual trade deficit partly reflects the dollar’s strength relative to other currencies. In some cases, other countries have suppressed their currencies’ value to make their goods cheaper for Americans.

China was the world’s leading currency manipulator during roughly the first decade of the 2000s, according to a paper by Joseph E. Gagnon, a former Federal Reserve Board economist now at the Peterson Institute for International Economics, and C. Fred Bergsten, the institute’s founding director. 

The paper estimated that currency manipulation cost the United States one million to five million jobs in 2011. 

Manufacturing jobs tend to be hit particularly hard by the strong dollar because manufactured goods are easy to import.

Over the past several years, medium-size economies like Switzerland, Taiwan and Thailand have been most active in holding down their currencies, Dr. Gagnon found in a more recent study. 

Collectively, currency interventions by such countries have been more than half the size of China’s earlier interventions, he notes.

But the dollar can appreciate even without currency interventions — for example, if foreign investors increase their appetite for American bonds, which require dollars to buy, as they have in recent years.
 
The former Rome Cable complex in Rome. President Biden has made reviving American manufacturing a top priority.Credit...Joshua Rashaad McFadden for The New York Times


Dr. Gagnon estimates that as a result of these forces, the dollar was 10 to 20 percent above its expected value in 2019, probably costing hundreds of thousands of manufacturing jobs.

Revere Copper Products in Rome, N.Y., which makes copper strip used in automobiles and air-conditioners, has suffered from these changes. 

In 2000, Revere had two plants and nearly 600 workers. Today the company, founded in 1801 by that Revere, employs about 300 and operates only one plant.

The strong dollar has made it difficult for the company’s customers to compete with imports, said its chairman, Brian O’Shaughnessy. 

In the 1990s, for example, Revere supplied several American door-lock makers with copper or brass. Today, Mr. O’Shaughnessy said, most of the lock makers have shifted production abroad, undercut by imports made cheaper by the strong dollar.

“The industry moved offshore,” he said. “It was currency. It overwhelms everything else.”

The U.S. government could reverse these trends using one of two approaches. 

It could essentially fight fire with fire — buying enough foreign currency to lower the value of the dollar by 10 to 20 percent and restoring the equilibrium that would exist without foreigners’ excessive dollar-buying. 

Or it could tax foreign purchases of U.S. assets, like stocks and bonds, an approach prescribed in a bill sponsored by Senators Tammy Baldwin, a Wisconsin Democrat, and Josh Hawley, a Missouri Republican.

A tax would make these investments less attractive to foreigners and therefore reduce their need for dollars. It would also raise revenue for the government.

But a tax would ignite opposition from financial firms, which would see it as driving away customers, and could raise interest rates by reducing the supply of potential lenders to the U.S. government. (John R. Hansen, a former World Bank economist who has designed such a proposal, said the rate increases were not likely to be significant.)

To date, a major obstacle to action on currency and the trade deficit has been resistance from senior economic policymakers in the U.S. government. Mr. Stumo said his group’s efforts to persuade the Obama administration of the dangers of an overvalued dollar and a large trade deficit were “the opposite of fruitful.”

Dr. Gagnon said that institutionally, the Fed and the Treasury Department tended to oppose adjusting the value of the dollar, both on philosophical grounds — economists there believe that markets should set exchange rates — and on practical ones. 

Doing so could require complicated judgments about when a foreign country’s efforts to influence the dollar should trigger an intervention, while the Treasury is likely to resist anything that makes U.S. government debt harder to sell, like a tax on purchases of debt by foreigners.

Menzie Chinn, an economist at the University of Wisconsin, said foreign investors could find ways around paying the tax, as they have to some extent in similar instances abroad.

Brian O’Shaughnessy, the chairman of Revere Copper Products, said the strong dollar had made it difficult for his customers to compete with imports.Credit...Joshua Rashaad McFadden for The New York Times


Even experts, like Dr. Bergsten, who acknowledge that the dollar is overvalued and results in job losses for manufacturing workers are reluctant to call for aggressive action. Some argue that the trade deficit is helping sustain economies abroad during a delicate moment for the global economy.

“It would essentially be an act of economic war to aggressively intervene to push the dollar down against the euro, the yen, the Canadian dollar,” Dr. Bergsten said. “Those countries are doing worse than we are.”

But the political landscape has shifted in recent years, as reflected in Mr. Trump’s rise, and momentum for reining in the dollar and the trade deficit may be building. 

Though Mr. Trump’s tariffs on products like steel and aluminum were ineffective on this front — tariffs tend to increase the dollar’s value, leading to more imports of other goods — the Trump administration gave the Commerce Department new authority to penalize countries that had weakened their currencies.

It used that authority for the first time in November to impose tariffs on Vietnamese tires, after the A.F.L.-C.I.O. submitted a petition saying Vietnam had used its currency as an unfair subsidy to producers.

Mr. Biden’s team may be picking up the baton. One of his top economic advisers, Jared Bernstein, has long expressed concern about the overvaluation of the dollar. 

A second, Bharat Ramamurti, oversaw economic policy for Senator Elizabeth Warren’s presidential campaign, which proposed “more actively managing our currency value to promote exports and domestic manufacturing.” 

And the Biden administration hired Brad W. Setser, a skeptic of the strong dollar, as a counselor to its trade representative.

These aides may face resistance from Biden advisers with more orthodox views. Treasury Secretary Janet L. Yellen said at her confirmation hearing in January that the dollar’s value “should be determined by markets” and that “the United States does not seek a weaker currency to gain competitive advantage.”

But some former Treasury officials interpreted this as a more nuanced position than that of other recent secretaries, who have explicitly supported a strong dollar.

“Secretary Yellen speaks for the administration on the dollar, and her approach fully reflects the president’s focus on fostering strong and equitable economic growth,” a White House spokeswoman said.

Those who have discussed the dollar and the trade deficit with Mr. Biden’s advisers have gotten the impression that many see it as a problem and are willing to press for action internally.

“I think they are probably having that conversation,” Mr. Stumo said. “Who comes out on top — we’ll see.”


Ana Swanson contributed reporting.

Noam Scheiber is a Chicago-based reporter who covers workers and the workplace. He spent nearly 15 years at The New Republic magazine, where he covered economic policy and three presidential campaigns. He is also the author of “The Escape Artists.” @noamscheiber

 Who’s Right on Inflation?

As in the 1970s, a severe economic shock has forced governments to pursue massive fiscal and monetary expansion, thereby sowing fears of future inflation. But not all shocks are the same, and the key question now is whether we can be confident that the current state of exception will end.

Harold James, Markus Brunnermeier, Jean-Pierre Landau


PRINCETON/PARIS – The specter of inflation has returned. 

For two decades, central banks across industrialized economies were confident that they had banished it for good. 

Then came the 2008 financial crisis, which occasioned a brief return of inflation anxiety on both sides of the Atlantic. 

In the United States, congressional Republicans ushered in austerity in 2010, and the European Central Bank started tightening its interest-rate policy in 2011. 

But then policymakers started to worry that inflation was too low, and that it might be impossible to reignite.

Now, the inflation chatter is back. But how seriously should one take it? After all, we have been here before, and not just in 2010.

The current debate reprises the confused policy environment of the 1970s, when inflation doves argued that the decade’s oil shocks – prices tripled in 1973-74, and again in 1979, after Iran’s Islamic Revolution – would not produce higher inflationary expectations or an inflationary spiral. 

Some prominent economists, like the British Keynesian Roy Harrod, even argued that growth-boosting monetary and fiscal policies would lower prices, because output and abundance would increase.

In response, inflation hawks warned against ever-greater monetary expansion, favored by banking and financial interests. The resulting increase in prices would create a ratchet effect in which organized groups – especially labor unions – would lock in higher pay settlements.

A common historical interpretation of this period holds that President Richard Nixon, and later President Jimmy Carter, bullied the US Federal Reserve into pushing for inflation. But Fed economist Edward Nelson’s recent wide-ranging study of the Nobel laureate Milton Friedman and the 1970s monetary debate refutes that interpretation. 

He shows that Fed Chair Arthur F. Burns, a man of impeccable monetary orthodoxy and a father figure to Friedman, was determined to prevent a new inflationary spiral.

But Burns had a mistaken theory of how inflation emerges. He was confident that the price and wage controls he advocated would control the wage-push effect that might follow from a onetime shock. 

The Fed thus confronted the Great Inflation of the 1970s with a faulty doctrine. Friedman built a formidable reputation on his prediction of runaway price growth.

Some European countries took a different route. The German Bundesbank, which had been worried about inflation long before the oil shocks, saw an opportunity in May 1973 to end the deutsche mark’s fixed exchange rate against the dollar. 

At the time, German banks bristled at the move, fearing that it would lead to bank failures. But later, with inflation, and thus interest rates, lower than in the US, German policymakers could argue that the ensuing 1973 oil shock really was a one-off episode. 

Owing to their initial success, they were in a position to accommodate it, and Germany suffered only mildly during the global downturn in 1975.

Generally speaking, a one-off shock can be accommodated without long-lasting effects, because everyone recognizes that it is an exceptional event. 

But when there are repeated cycles of shocks and policy responses, a pattern emerges. 

People’s views of the future start to change as the exceptional becomes normal. In the language of central banks, expectations become unanchored.

Similar arguments have been made about major military engagements, which require large fiscal outlays that push up demand temporarily (that is, for the duration of the conflict). 

After World War I, the US and the United Kingdom pursued a rapid return to “normalcy,” embarking on a painful process of disinflation. 

In Central Europe, however, there was deep and lasting political and social fragility, creating the impression that wartime circumstances still remained, and that wartime fiscal responses were still needed. 

These countries ended up on the road to inflation, and then hyperinflation.

The same reasoning can be applied to the COVID-19 pandemic. There is no doubt that large monetary and fiscal buffers were urgently needed to mitigate the immediate shock of the virus and the attendant economic lockdown. 

Were the buffer to be withdrawn at some clearly defined moment, there would be no long-term consequences for price expectations.

But like the coronavirus itself, economic malaise could linger as societies continue to suffer from the disease. 

The impact will not be evenly distributed. The tourism and travel industries will undergo severely delayed recoveries, and thus will demand continuing fiscal support. 

The challenge will be to distinguish hard-hit but still-viable sectors from economic activities that have suffered a permanent shock as a result of technological developments or behavioral changes.

Though policymakers all recognize the one-off character of the COVID-19 shock, they have begun to diverge on the question of how to respond. 

US President Joe Biden’s administration is convinced that its proposed $1.9 trillion recovery package (which comes on top of $3.1 trillion of expenditure in 2020) does not pose any long-term danger.

Fed Chair Jerome Powell acknowledges that pent-up demand might trigger a short-term jump in inflation, but he believes this would be temporary, given the experience of the last 20 years. 

Similarly, the ECB argues that a quick price spike should not be over-interpreted as the return of inflation. As ECB President Christine Lagarde has confidently put it, 

“It’s going to be a while before we worry about inflation.”

By contrast, some EU member states – especially in the “frugal north” – are beginning to worry about a new and dangerous worldwide inflationary consensus. 

And some Americans, including former Secretary of the Treasury Lawrence H. Summers, who previously advocated fiscal stimulus, have begun to voice similar concerns.

With the same divergences that accompanied earlier shocks reappearing, we need a simple test to navigate the new-old inflation dispute. 

The key question is whether we can be confident that the state of exception will end. If we can clearly identify that moment, we need not worry about inflation.

But if one exception begets more exceptions, there will be no clear way out. 

Instead, expectations will shift, and inflation will increasingly factor into our vision of the future. 

That will create political uncertainty and acute polarization between countries run by fearful hawks and those run by self-confident doves.


Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.

Markus Brunnermeier is Professor of Economics and Director of the Bendheim Center for Finance at Princeton University.

Jean-Pierre Landau is Associate Professor of Economics at Sciences Po.

Evolution, Not Revolution, in Economics

A growing acceptance of aggressive fiscal policy is supposed to be the first principle of a new, post-revolutionary regime in macroeconomics. But the only genuine conceptual change in the decade since the global financial crisis has come from efforts to explain when and why "unconventional" monetary policy works.

Andrés Velasco



LONDON – While they stare quietly at their models, macroeconomists are hearing the distant rumble of revolt. 

A year ago, the Nobel laureate economist Joseph Stiglitz announced that capitalism was undergoing “yet another existential crisis,” with “neoliberal ideology” to blame. 

Now Robert Skidelsky has proclaimed the arrival of a “silent revolution in macroeconomics.” Martin Sandbu of the Financial Times prefers the plural, celebrating the “revolutions under way in macroeconomics.”

For too long, international institutions have failed to address one of the most toxic aspects of globalization: tax avoidance and evasion by multinational corporations. 

Fair taxation of multinationals must be a central part of any tax system aimed at driving economic growth and creating high living standards for all. 

A growing acceptance of aggressive fiscal policy is supposed to be the first principle of the new, post-revolutionary regime. Even the International Monetary Fund – once lampooned as “It’s Mostly Fiscal” for wanting to impose austerity everywhere – is now calling for more fiscal stimulus to fight the crisis.

So, if a revolution is under way, what kind is it? 

Should conventional macroeconomists fear the intellectual guillotine?

A practical sea-change is indeed occurring. According to the January update of the IMF’s Fiscal Monitor, 2020 fiscal deficits averaged 13.3% of GDP in advanced economies and 10.3% among emerging markets, and will exceed 8% for both groups of countries in 2021. The Fund expects gross public debt to reach 99.5% of world GDP by year’s end.

But there is no conceptual revolution at work here. The idea that in a liquidity trap – when interest rates can go no lower – fiscal policy is the only game in town is key to John Maynard Keynes’s General Theory. 

Most mainstream macroeconomists called for a robust fiscal response to the financial crisis in 2007-09 and again when COVID-19 hit. A few professors deny that fiscal stimulus has a role to play, but you have to look hard to find them.

What has changed is politics. In late 2008, US President Barack Obama’s advisers wanted $1.8 trillion in fiscal stimulus. Congress passed a package of less than $800 billion, over the opposition of every House Republican and 38 of 41 Republican senators. 

Fast forward to March 2020. Congress approved a stimulus package worth $2.2 trillion. Every Republican senator voted yes. 

What changed? Well, a Republican, Donald Trump, was president.

In Germany, Chancellor Angela Merkel has also turned the politics of fiscal policy upside down. She persuaded Germany’s hyper-conservative economic establishment not only to run a deficit in 2020, but also to issue bonds jointly with other European Union countries – previously taboo – to finance the bloc’s €750 billion ($909 billion) pandemic recovery fund.

The world is also different than it was before the 2007-09 crisis. In the 1980s and 1990s, real interest rates were positive and, in some countries, high. 

A government with large debts had to pay a sizeable share of its budget in interest every year. That was money not spent on health, education, welfare, or green infrastructure. In that situation, most economists – even progressives – counseled prudence.

Today, with the real interest rate at or below zero, a country in the same situation must make real interest payments of, well, zero. 

No wonder then that respected economists, like MIT’s Olivier Blanchard, argue that sustained low interest rates make room for a much larger public debt.

A conceptual revolution did happen, but it involved monetary policy, and it began over a decade ago. In the wake of the 2007-09 crisis, central bankers began doing what the doctor traditionally had not ordered. 

Under new labels – “quantitative easing” and “credit easing” – they printed trillions of dollars in new money and used it first to buy government bonds and then corporate bonds.

For decades, we macroeconomists had been teaching students that in the long run, the price level is roughly proportional to the money supply, so that if you double the money supply, accumulated inflation will eventually reach 100%. 

But in the 12 years starting in January 2008, the Federal Reserve increased the most common measure of money by a factor of three, and subsequent inflation barely budged. 

In the year since the coronavirus pandemic began, that same measure of money supply has quadrupled, and inflation is yet to appear.

These new facts sent macroeconomists racing to re-jig old models. So did the growing realization that the new, “unconventional” monetary policies seemed to work, in the sense of helping to restore financial stability and putting a floor on the depth of recessions. 

In 2014, Ben Bernanke quipped that “the problem with quantitative easing is that it works in practice, but it doesn’t work in theory.” 

By now, macroeconomists have written dozens of papers clarifying the conditions under which quantitative easing works in theory and in practice.

Sandbu is on firm ground when he claims that another change is underway: a growing awareness that multiple equilibria should be a crucial concern when crafting policy. 

In the standard diagram, if demand and supply schedules cross only once, that market has a unique equilibrium. If they cross two, three, or more times, then multiple equilibria are at work.

This, too, is not conceptually new. 

Keynes’s politically incorrect “beauty contest” analogy in his General Theory hinted at multiple equilibria. In 1965, British economist Frank Hahn published a famous paper arguing that all monetary economies have more than one equilibrium.

The practical implications are enormous. If there is more than one feasible equilibrium, expectations can be self-fulfilling: pessimism delivers outcomes worth being pessimistic about, and the change can come suddenly and without warning. Policymakers increasingly recognize this danger. 

As Blanchard points out, the risk of confidence crises and runs on debt is the most important counter-argument to the case for allowing the public debt to grow.

Determination to avoid a bad equilibrium can prompt quasi-revolutionary policy activism, such as then-European Central Bank President Mario Draghi’s promise in 2012 that the ECB would do “whatever it takes” to save the euro. 

But the risk of a self-fulfilling panic can also necessitate policy prudence, not revolution. If regulators worry about bank runs, then they will require banks to hold bigger cash reserves for every dollar they receive in deposits. 

If you worry about runs on government debt, then you will vote for politicians who advocate borrowing less, and at longer maturities.

In their eponymous song, the Beatles are skeptical about revolution:

You say you want a revolution

Well, you know

We all want to change the world

You tell me that it’s evolution

Well, you know

We all want to change the world


For macroeconomics, recent events suggest evolution, not revolution. 

And it is evolution – adaptation to new facts – that brings lasting change to the world.


Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities.