We’re in a New Cold War With China, Says Nouriel Roubini

CHRISTIANE AMANPOUR, HOST: Now, from war to the climate. Tonight’s program has highlighted the connection between several of the world’s most pressing issues. And our next guest says 10 interconnected threats are endangering our global future. He’s known for predicting the 2008 financial crash, economists Nouriel Roubini now lays it all out in this new book “MegaThreats”. He tells Walter Isaacson what that dystopian future could look like and how to avoid it.

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WALTER ISAACSON, HOST: Thank you, Christiane. And Nouriel Roubini, welcome to the show.

NOURIEL ROUBINI, AUTHOR, “MEGATHREATS”: Great pleasure being with you today.

ISAACSON: You’re usually talking about quick economic threats. Things involving finance and all. But in this new book, “MegaThreats”, you expand. You talk about social things. You talk about environmental problems. You talk about technology problems. Tell me how all of these are interconnected and why you expanded your view of the problems are facing.

ROUBINI: I expanded the view of what are the threats that are affecting us because the economic monetary and financial threats and risks are connected to other ones. They are leading to political strains, to geopolitical tensions and vice versa. To social political and geopolitical tensions are affecting economic outcomes. So, in some sense, I’m considering, as you point out, not just the economic factor but the political, the geopolitical, the environmental ones, the health one, the technological one. There’ like a 10 by 10 matrix. Each one of these mega threats affects the other one and is affected back. So, you have to think of it as being a holistic set of threads that are connected to each other, they’re all interconnected.

ISAACSON: So, let’s look at this populist backlash that’s happening around the world which sort of falls into your category, political threats that have happened because of economic policies. What’s causing this political populist backlash?

ROUBINI: There are many factors but sinces I’m an economist, I stress the economic ones. We’ve seen a significant rise in income and wealth inequality within countries, not just in advance economies but even in countries that are growing like for example China and other emerging markets. The gap between the rich and the poor is widening. So, there is economic malaise, there is social malaise, there is inequality. Right now, real wages are starting to fall because of inflation. And all of this literal (ph) backlash against liberal democracy. There is a view that the economic and financial and the political elite do not care about workers, about those who are being left behind because of technology, — — because of globalization, because of all the disruption that are occurring to create distraction. So, that’s leading to a backlash against essentially establishment parties, whether of the right or the left.

ISAACSON: You talk about the wealth inequality, income inequality. The sense that we don’t care about workers anymore. But the way to combat that, it would seem to me, would be policies that help increase wages, increase incomes. Including monetary policies that are easy. Yet you argue against those in the book.

ROUBINI: In my view, those economic policies that were loose monetary and credit policies did avoid a great recession from becoming another great depression. But they inflated other prices, the value of, say, stocks and about 80 percent of all equity in the U.S. is owned by the top 10 percent, while the bottom 80 percent doesn’t own much of those assets. So, it’s led to asset inflation, initially. But now it’s led to goods inflation. And goods inflation implies the prices are rising more than wages. Real wages are falling. And because of that, the economic disparities are becoming even bigger. Unfortunately, some of these economic policies have led to an increase in income of wealth inequality.

ISAACSON: So, what do you do to reduce wealth inequality?

ROUBINI: Well, if we look at the historical record, unfortunately, even progressive taxation policies have had only limited impact in reducing inequality. There are history books that have been written that show that only civil wars, revolution, wars, famines, literal reduction of inequality. But that’s not the way we want to have a reduction of inequality. It would be a disaster, like it happens after wars. Of course, we need progressive taxation so that when globalization or trade or technology increases inequality, because a lot of tech innovation is capital intensive, skill bias, and labor saving then we tax those that are better off, those that are the winners, and we transfer resources to those who are left behind. Now, transferring this resource is not sufficient. People don’t want to just have their wealth rechecked (ph). If automation is going to destroy job, they want to have the dignity of new jobs. That’s what many people are against the transfers and welfare. That’s much harder because if technology is going to lead to massive technological unemployment because of A.I., machine learning, robotic and automation, the economic pie is going to be larger. We can tax those who win and transfer to those who are left behind. But those who are left behind won’t have the dignity of work. That’s going to be much harder to address and to obtain.

ISAACSON: Well, you’ve just said the technology will reduce the number of jobs. I’ve read you for a long time. You’ve never made that argument before. You’ve always believed that technology would not, in the aggregate, cut down the number of jobs. Why are we in a different period?

ROUBINI: I think we’re in a different period because in the past when agriculture jobs fell, people moved into industry. And when people move from industry to services because there was a revolution of productivity and manufacturing, then we had more service jobs. However today, what’s happening is that A.I., machine learning, robotic, automation is not going to only destroy blue-collar jobs. However, but many white-collar jobs are now subject also to automation. We initially had only routine jobs that were blue-collar but now cognitive jobs can be sliced in different tasks. These tasks can be automated and the big revolution is going to be the displacement of millions of people that are in the service sector. I’ll give you an example. Once we have autonomous vehicles, five million plus lift and Uber drivers are going to be without jobs. five million truckers, frimsters (ph) are going to be without the job. Social is a benefit. There are hundreds of thousands of people who die of car accident every year. A million of them are injured severely. We can reduce them by 19 — 99 percent. But the impact of job is the 10 million jobs are going to be done.

ISAACSON: But wait, let me push back on you. You talk about with self- driving cars, Uber drivers will be put out, or the truck drivers will be put out of work. Talking about things like that. We go back a, you know, few years and say, OK. Self-driving elevators, we put the elevator operators. Self-pumping gas stations, we put gas station attendants. But every time we do it, there’s an increase in total employment because there is an increase in productivity. Why is this time totally different?

ROUBINI: It’s different because the nature of A.I. and machine learning is that not only routine jobs, not only cognitive jobs, but even creative jobs now can be replaced by the machine. And of course, there are extreme cases that people are thinking about technologies when you reach singularity. You reach a super intelligence when essentially even sapiens, our own species is going to become obsolete.

ISAACSON: But, wait, do you see any data for this yet? Do we have any evidence yet that people being put out of work in the aggregate? I mean, unemployment is so low.

ROUBINI: In the aggregate, we’re not seeing it. What I’m saying is that this technological revolution has just started. We are only in the beginning innings of this and there is going to be a radical change. I believe that 10 years from now, my job as an economist of, say, predicting, what the Fed will do is going to be replaced by an A.I. Because then an A.I. can take all economic data, all the speeches by every Fed governor and make a prediction about what the Fed is going to do the next and foresee anything better than an economist. We are not yet there, but 10 years from now we’re going to be there. DALI-2 right now creates art that is better than a human. There are pieces of music that are being written purely by an A.I. And it’s only a matter of time until a piece of music written by an A.I. is going to be in the Top 10 Billboard Magazine hits, at least.

ISAACSON: Among the other things that increase wealth inequality, besides technology, which we’ve talked about, is trade. Should we have more free trade or should we try to insource more and have trade in, sort of, more friendly regions and not be so dependent on global supply chains with countries that may not beast geostrategically connected to us.

ROUBINI: The reality is that the backlash against free trade initially had to do with those who were left behind. Then there were environmental concerns, then there were labor standard concerns. But now there is a new layer, the geopolitical tensions between U.S. and China and Russia and Iran and North Korea implied that we are going in the process of deglobalization. Of fragmentation of the global economy, of decoupling, of Balkanization of the global supply chains. Now, if you care about security, of course, we should not invest as much in China. Instead of offshoring, we should have reshoring or friendshoring. Producing in countries that are friends of us. However, that process of friendshoring and of secure and fair trade, as opposed to free trade, has economic costs. Is, as I say, stagflationary because it reduces potential growth because you are not producing where it is most efficient at least costly. You’re producing where it’s more costly. It gives us some national security but increases the cost of production. So, it’s one of the factor that reduces economic welfare, even if it gives you more social political security.

ISAACSON: We are about to go into the midterm elections and people are seeing all these economic shocks, blaming it on the administration. But is this, you know, U.S. problem or is this pretty much the same around the western world? And if so, are there any countries doing it right?

ROUBINI: The problem with inflation right now is global. The only countries that have still low inflations are Japan, there’s a structural deflation for a while, and China that is repressing its inflation by controlling a variety of prices. But now, there is almost double-digit inflation, not only in advanced economies, but actually more than double digit in a majority of emerging markets. Now, was it bad luck or bad policy? Bad policy being loose monetary, fiscal, and credit easing too much for too long during the COVID crisis. I think it’s both. On one side, we have policies were too loose in U.S., in Europe, in advance economies, in emerging market. But also, with bad luck. A series of negative supply shocks. The initial COVID crisis, the shutdown of production, and the shutdown of economic activity, and the blocking of supply chains. Then the Russian invasion of Ukraine, that brutal invasion that’s led to a spike in oil prices, energy, natural gas, food, fertilizer, and industrial metals. And three, I just got back from Hong Kong. There are still draconian lockdowns. We have the zero-tolerance policy of China towards COVID that is creating massive bottom nights (ph). Right, now even Foxconn that is producing Apple — half of the Apple iPads and iPhones in the world is now in a severe lockdown, 200,000 people. And you have similar types of lockdowns in Shanghai, in Disney World in Shanghai, and so on. That has lead into a sharp, also, fall of economic activity in China and creating further disruption to global supply chains. How much bad luck? How much bad policy? I would say half and half. In Europe, more bad luck, because they are exposed to energy from Russia. In the United States, monetary, fiscal, and credit policy were way too loose for too long. So, it’s a combination of both.

ISAACSON: You say we are in a new cold war with China. Why? What — why does that make sense for us to be in a cold war with China?

ROUBINI: China is a rising economic and financial and political and geopolitical power. And as you know, this torrent (ph) of the term of the – – to see the disrupt of what happens when you have a rising power facing an existing power. And as Graham Allison’s book about the — a city’s disruption (ph), in the last 500 years, in 12 out of 16 episodes where you have the rising power facing an existing power, not only do you get a cold war, but eventually you’re getting a hot war. Because there is a rising power that is challenging the hegemonic power of the times. And we are starting to see a decoupling within U.S. and China in all dimension. Trade in goods, in services, in the movement of investment and capital, movement of labor, technology, data, information. And the U.S., this past October, has passed, what I call, the beginning of an economic and technological war against China. The restriction to the export of semiconductors and semiconductor equipment to China are massive. Massive in a way they’re going to lead to China to react in a way that is going to become dangerous. They are going to feel like they don’t want to compete with them only, we want to contain them. And they are going to become more aggressive. They could counter sanction us by restricting, for example, the exports of rare Earths that are fundamental for producing semiconductors, green metals, and things of that sort. During World War II, before Pearl Harbor, U.S. restricted the export of oil and scrap metal to Japan. That made Japan so threatened that they struck us in Pearl Harbor. We are beginning something that maybe is necessary. Because if we are not trying to control the development of China, not just of semiconductors, but of their A.I., machine learning, and counter computing, whoever is going to win that race in the future is going to dominate not only the global economy, but is going to become the military and the security and the geopolitical hegemon of the world. So, we have this cold war, is getting colder, and is becoming worse and worse by the day. Whether it’s going to lead to a hot war or not over the shift of Taiwan, we don’t know. But last week, the head of the U.S. navy said that China may strike Taiwan, not five or 10 years for now, they say it could happen as early as 2024. So, these are factual risks that we are facing. I hope that we can avoid this cold war from becoming a hot war, but we are on a collision course with China whether we like it or not.

ISAACSON: Well, this is a very scary book, as you have told us today. And there are only seven pages, I think, in it about a possible, more utopian future. So, at least give me a little thought about how things could turn out well and how we can get to a more utopian future?

ROUBINI: Well, in utopian future starts with essentially technological innovation. For example, in the energy sector, if fusion were to become a successful technology, we could produce and limited the amount of cheap energy with zero greenhouse gas emission. I think in the future, actually, of resolving climate change is not renewable. It is growing — but it’s growing way too slowly. Solar, and wind, and so on, but it’s going to be fusion. But we may be only 20 years away from fusion. So, technology can increase the economic pie. It may increase inequality, but then we can tax the winners and transfer to others, or rescale them or ratio scale (ph) them, and so on. It can reduce problems of that because output is higher. It can resolve lots of problems also, not just of climate change, but pandemics and other biomedical problems. And the solution has to do with technology first.

ISAACSON: Nouriel Roubini, thank you so much for joining us.

ROUBINI: Great being with you today. Thank you.