Benjamin Felix

July 9, 2020

Economics, Inflation

Episode 106: Dr. Jim Stanford: The Economics of Capitalism in a Crisis

Benjamin Felix

July 9, 2020

Economics, Inflation

Dr. Jim Stanford is Economist and Director of the Centre for Future Work, based at the Australia Institute. He has served as the Director of the Centre since its founding in 2016. Jim received his Ph.D. in Economics from the New School for Social Research in New York. He also holds an M.Phil. from Cambridge University, and a B.A. (Hons.) from the University of Calgary.

Jim is the author of Economics for Everyone: A Short Guide to the Economics of Capitalism (second edition published by Pluto Books in 2015), which has been published in six languages. He has written, edited or co-edited five other books, and dozens of articles and reports in both peer-reviewed and popular outlets. Jim maintains an active presence on social media, with his Twitter (@jimbostanford) and Facebook (Jimbo Stanford) accounts.

Today’s guest is Dr. Jim Stanford, Economist and Director of the Centre for Future Work and author of Economics for Everyone. We kick things off with Jim hearing his perspectives on what makes this recession unprecedented before he argues that a traditional approach to macroeconomic policy won’t be enough to augment more than a crippled and unstable recovery. This situation might hold a silver lining though and Jim sketches out the opportunity it provides for rethinking employment ethics. After weighing in on why the deficits caused by a much-needed post-war style economic reconstruction might not such a bad thing, Jim does an amazing job of explaining the connections and differences between quantitative easing and government deficit. On this topic, he talks about why fears around credit creation are centered on an outdated concept of banking, and the potential quantitative easing has for facilitating investment and economic activity in this recession rather than buying corporate assets in the secondary market. From there, we talk about wealth distribution, the inevitability of an economic system that supersedes capitalism, and the concept of the political economy. Jim gets into how issues about history, norms, culture, and power – things that don't show up in your usual supply and demand graphs – are actually crucial inputs for understanding the economy and understanding economics. Don’t miss this incredible conversation about ethics and capitalism with today’s guest.

Key Points From This Episode:

Introducing Jim Stanford and his work on economics and quantitative easing. [0:00:05.3]
What makes this recession unprecedented; the ‘Loch Ness Monster’ recovery. [0:03:16.2]
How many of the most vulnerable groups are experiencing more job losses. 0:06:27.3]
Challenges of remote work and implications that only 25-30% of jobs can be done remotely. [0:09:32.3]
Impacts of social distancing on the economy, a socially constructed phenomenon. [0:12:07.7]
Avoiding the Loch Ness recovery by implementing a post-war style recovery plan. [0:14:53.3]
The silver lining of this crisis: putting an end to inhumane work arrangements. [0:18:38.4]
Why large deficits that could come with a reconstruction might not be a problem. [0:21:02.0]
Connections and differences between quantitative easing and government deficit. [0:24:30.3]
Dispelling fears of credit creation inflation; how banking actually works. [0:28:14.7]
The dangers of quantitative easing and how it can be better used in the recovery. [0:32:44.3]
Why GDP might not be the best measure of how well an economy is doing. [0:35:49.1]
Metrics that make skew wealth distribution seem less harsh than it is. [0:38:58.2]
The precariousness of the bank and mining-based Canadian economy. [0:41:49.9]
How Capitalism is not perpetual and examples of seeds of change. [0:46:17.3]
Why the capitalist economy is political and gross inequality contradicts it. [0:50:21.8]
Jim’s education, early activistic goals, and definition of success. [0:53:28.5]

Read the Transcript:

Are there any historical examples that we can compare the current situation to?

No, we are in uncharted terrain here, there's no doubt about it. In terms of the depth of the downturn, there is a precedent. It was called the Great Depression in the 1930s, but that took us years to get to the bottom to the trough and it happened through the kind of usual mechanisms of a macro economic cycle. There was bad news in some areas, and then that spread to other areas with impacts on confidence and spending and supply chain effects, all the usual chain reactions in a macro economy and in the 30s, of course, worsened by terribly counterproductive macro economic policy from government.

It still happened in that kind of gradual spreading way. What's happened this time was we deliberately shut down all segments of the economy to meet public health goals and try to stop contagion and flatten the curve. So both the depths and the speed of that downturn is absolutely unprecedented. Now on top of that, we're getting some of those normal macro economic chain reactions happening. So that's why I'm not at all optimistic that the worst is over.

I know we had a little bit of a bounce in employment in the main numbers, but there's a whole second order of effects that's going to happen as companies adjust to what they think is a permanent reduction in demand and consumers adjust their general spending habits downward, and so on. So this is a new experience, and it's partly because we wanted it to happen, but now it's up to us to make sure we don't get stuck in another decade long depression.

I saw you tweet recently about the shape of the recovery and I think you were looking for a name and someone suggested, what did they suggest? I can't remember now.

Oh yeah, this is fun. You've heard of the so called V shaped recession, for those optimists who think the whole thing will bounce right back or a U shaped recession or an L shaped recession for pessimists who think there'll be no recovery at all. I thought of one that was kind of a unique shape down like the V, partway up like the V and then bouncing along, like kind of a bit of a roller coaster, suggesting we'll get some immediate bounce back as the health restrictions are relieved, but there's no way we'll get back to potential or no way we'll get back to where we were before the pandemic, because of all of those shattered spending decisions and confidence in the business community and in consumers and so on.

So I drew that shape. Then I said, "Twitter, what the heck do you call this shape?" I got some really interesting answers. Somebody said it looked like a sideways corkscrew, but I couldn't quite find a corkscrew that had that weird V shaped handle. Somebody else said it looked like an electrical circuit diagram. The one that stuck, this is fabulous. They called it the Loch Ness Monster. Because if you've seen pictures of the Loch Ness Monster, you know its head is poking out of the water, then its neck comes down, but then his body comes back up always and then it wiggles along in the water.

I thought that was perfect. In fact, I found a cartoon of the Loch Ness Monster and posted it beside my picture and you could see it. So I think we've got a new hashtag here, #LochNessMonsterrecovery.

So who's being hit the hardest from this pandemic in the economy?

Oh, Cameron, that is such a vital question. I'm really glad you asked it, because every recession is an unfair experience. It seems that it's inevitable that people hurt hardest in a downturn by and large are the ones who could at least afford it in the first place, but this time around, it is brutal. It is brutal and unforgiving how the job loss impact of this recession have been concentrated among workers who experienced precarious or insecure work, low wage work, other parts of society who were on already having a hard time making ends meet.

So the numbers are startling. First of all, unlike previous recessions, this one has hit women harder than men, because it started in the service sector where women are more likely to work, and also because women are over represented in these insecure jobs, part time, temporary, et cetera, where you're almost certainly going to be the first one let go by the employer.

So there's a gender piece of it. Young people have experienced three times job losses of the core working age population. Temporary workers, obviously, this should be a no brainer, have experienced two or three times the rate of job loss of permanent staff. That's the whole point from the employers' perspective of hiring temporary or on demand or contingent employment relationships because you can wash your hands with those people if business turns down.

Other ways, kind of interesting. Private sector has been hit far more than the public sector, non union workers have experienced more than twice the rate of job loss of unionized people. Again, that makes When you think of it because with a union, you've got a contract that the employer has to go through certain, at least notice and severance processes. There's also a shocking correlation with income.

My colleague, David McDonald, who works at the Canadian Center for Policy Alternatives. He's a real number cruncher nerd guy. He gets into them. The unpublished micro data on the labor force survey and he's found a shocking correlation between job loss and income levels. Over half, over half of the people in the lowest two deciles of the distribution, this is people who were earning under $16, an hour before the pandemic, over half of them have lost all or most of their work.

At the other end, the top decile, the top 10%, these are people who made on average about $50 an hour or more, most of them salaried, of course, have experienced almost none of that, almost none of those people have lost most or all of their income. So this is having a tremendously dis-equalizing impact. The biggest burden that's being borne by those who can least afford it and I think we got to keep that front and center as we're designing both the recovery policies, and the income support policies to help people through, to recognize how concentrated the pain is in low wage and insecure segments of the labor market and deliver the most support, and the first opportunities that new jobs to those constituencies. We have to do that.

Wow. So I guess it's safe to say that I think the data that you just gave answers the question, but the shift to working from home, which is often easier for salaried professionals to do, that's going to increase the inequality that maybe already existed.

That's an interesting point and an angle that I don't think we've thought through. First of all, I think there's an assumption that while everybody can work from home and of course, that's nonsense. There's a lot of people working from home, 5 million Canadians, according to Statistics Canada, and that tripled the number of people who'd been working from home, all or mostly before the pandemic. It's been important for families where you can work from home, that means you've been able to keep working and keep earning income and it's been important for the economy because we're still producing and adding something to GDP, anyways.

So it's been an important cushion, but first of all, most people can't work from home. Our research suggests maybe between 25 and 30% of all jobs could be done effectively from home on a long term basis, by the time you adjust systems and equip people with the right technology and that kind of thing, but that means 70 to 75% of people can't.

They have to go to a designated worksite, either to use the equipment or to work on a particular thing there, or to deal with customers there, or whatever. So we can't see working from home as a panacea, to the extent that we do keep working from home more than we did before. I don't think all of those 5 million are going to keep working from home because we all know there's lots of drawbacks for both the employer and the employee. I think in general, most people are going to want to get back to the regular workplace when it's safe to do so.

I do think there'll be a permanent uptick in how many people are working from home and I think it will be important to think through some of the issues about how do we organize that in a sustainable way. How do we make sure it's safe and fair for people to work from home. There's lots of issues that people don't think about, workplace health and safety for example.

If you're employed and working still at home, but doing it for pay, your employer still has a duty of care in terms of workers' compensation, health and safety rules. That means we've got to get people set up right with the right desks and the right ergonomics and safe lighting and electrical wiring. Even things like domestic violence, women working from home have faced elevated incidents of domestic violence during the pandemic, and we've got to make sure that people are aware of those risks and supported to address and escape them.

So I think it will be a fascinating area. I don't want people to just kind of drift into it and think well, all you need to do is get your laptop, sit on the couch and do your work. I think if we're going to do it properly, we've got to take it seriously.

So in your book, Jim, which side note i thought was fabulous. I'm just going to hold it up for our viewers on YouTube. Excellent book. You talked about how the economy is fundamentally a social system. So I'm curious what you think shift, how will it make the economy less social? What might the impacts be on the economy going forward?

Oh, that's a great question and thanks for the plug, by the way, Cameron. I'll give you your free beer payment when we can meet in person. Yes, economics is a social activity. None of us work alone. I hate the term self made millionaire or self made billionaire. Nobody did it by themselves. They always had a team. Even if they owned the company themselves, there was people working there and they had suppliers and they had customers and we all work together one way or another, directly or indirectly.

That's why I think economics is taught as a social science and how it should be taught, rather than pretending it's like physics and you can describe every interaction with a formula. I'm not against using math and economics, but we have to remember we're dealing with human beings who interact in social context, and have respective and often competing and conflicting interests. So issues about history and norms and culture and power, things that don't show up in your usual supply and demand graphs, are actually crucial inputs for understanding the economy and understanding economics.

So now we have a situation where 5 million people are doing their work in a way, in an isolated fashion. In fact, that was the idea. That's what physical distancing is all about is to keep us isolated in that sense and you're right, it will change the relationships in ways that I'm concerned about. I think, first of all, it could make our work less effective. I think we all learn a lot from our peers and talking things over and generating ideas. I know I do.

I also think that it changes the nature of workplace relationships. I think there's a natural inclination when you work in a collective setting, whether it's an office or a factory, or a store or warehouse to feel a common interest with the other people who are in your situation, and that can lead to good things and bad things. In general, I think the more people identify themselves as part of a bigger thing, rather than an individual, maximizing agent going out to do the best that they can as an individual, then I think we're better off.

Some of those issues related to home work that I just mentioned, are going to be very difficult for people to deal with on a one on one basis. If we leave it up to each individual who works at home to identify the issues, including all those health and safety issues that we talked about, and then think of how to address them. Then the hard bit, talk to their employer about how do I get support for this? How do I get compensation for this? How do I put limits on my work hours?

Guess what, just because my computer is right there doesn't mean I'm always on the job. Those are things that are impossible for an individual to deal with. That's where we need things like regulations, policies, collective agreements. So it will be a challenge. You're quite right, Cameron, it will be a challenge to preserve the social dimension to work when people have been fragmented and are doing it in the privacy of their own homes. I think that'll be crucial if we're going to do it right.

Wow. Jim, you mentioned the Loch Ness Monster recovery. Is there a way that doesn't happen? Is there a way that we have a more steady, persistent recovery?

There is definitely a way and I don't, in any way, want to imply that it's inevitable that we kind of get stuck at that halfway point for recovery, and just have to live with it. It isn't inevitable at all, but I think that's what will happen if we count on the normal mechanisms of the economic cycle to do the job for us. The traditional approach to macroeconomic policy has been as a sort of counter cyclical smoothing or a stabilization tool.

You've got those normal ups and downs of a market economy, and the government steps in the bad times to give it a little extra juice, but the assumption is that the economy is in good working order as a machine and with that little bit of extra juice, it'll get back to its normal capacity. Then in theory, it does the same when the economy is getting a little overheated. It just takes away some of the juice, whether it's higher interest rates or whatever.

So that vision isn't going to work right now. First of all, the private sector, both businesses and consumers, I think are so shocked by what's happened, so uncertain about what comes next, including the second waves of COVID, let alone the longer run consequences of financial and economic and political instability that we're already seeing around the world, including just south of us in America.

So they aren't going to spring back to life, even if they get a little juice, even if they get a little tax cut or a little fiscal stimulus. I've been arguing then that we need to think of this as a reconstruction and I draw the analogy with a post war reconstruction. When we got through World War Two, for example, and western economies were devastated especially of course, where the fighting was, we had ambitious sustained, extremely well resourced plans to reconstruct the economy.

In Europe, it was called the Marshall Plan, and the Americans for various reasons, including their own geopolitical self interest, pumped tens of billions of dollars into rebuilding European industries and the economy. Even in Canada, we had a vision of national reconstruction which included various measures to try and put the soldiers back to work. Remember, we had been in a decade long depression until the war ended the depression, and suddenly we put everyone to work in the war effort, but people were extremely fearful with good reason.

Well, what if we get right back into depression when the war is over? So they made it a priority, a national priority to make sure that didn't happen. So they had all kinds of initiatives ranging from huge infrastructure projects, like the St. Lawrence Seaway, modern industry, building things, that's when Canada became a manufacturing powerhouse, in part because of deliberate strategies to build our capacity in auto and aerospace and other key manufacturing sectors.

Rolled out a whole network of public programs, including universal public education and higher education and eventually Medicare and all the health facilities that went with it. So we ended the war, we had a huge debt load, by the way, much bigger than it is now, probably in the order of 150% of GDP, but that didn't stop us from saying now we're going to put people back to work and do it well. I think we're going to need a similar, probably 10 year reconstruction vision to rebuild after our war against COVID-19.

It's going to require not just the short term debts that government ran up to help people through the pandemic and the lockdowns, it's going to require a long term commitment to mobilizing resources, in infrastructure, in expanded public services, in community services, in direct public sector hiring in order to get back to a place where economic growth can be sort of self sustaining again. Otherwise, I think we will get stuck at that halfway point that was indicated in the Loch Ness Monster diagram.

So is there a chance that the response in government to the pandemic might result in like a new and improved version of North American capitalism?

Yes, I think so. In my line of work, I have to be sometimes mindlessly optimistic even though economists are known as the dismal science. I have to be hopeful, otherwise, I'd give up this job and do something else. I think there could be a silver lining to this pandemic. I say silver lining carefully. I don't want to minimize the horrors of what's going on, especially for families that have lost a loved one.

I do think it's going to force us to question some of the ways we were doing things before. My specialty is in the area of work and labor markets. I think the pandemic is going to force us to very, very seriously re-examine the whole phenomenon of precarious work, and how we've constructed this kind of just in time, on demand workforce in many sectors of our economy. Apart from that being very unfair for those who are in those jobs will never have hope of a permanent job with benefits where you could take out a mortgage and buy a house and put your kid through university, we now have a new issue, which is the public health dangers of people doing important but low paid jobs and treated like a disposable input rather than a human being.

We saw that in long term care, the whole reliance on agency staffing and multiple job holding turned out to be a critical vector for spreading COVID from one long term care facility to another and it was a disaster and it's cost hundreds of lives. So this is a time for us to rethink how we treat those jobs, even low wage so called menial jobs, and treat them like professions.

Frankly, carers and cleaners, and retail clerks should all be valued because they all have a responsibility to keeping society safe, not just delivering a unit of labor effort in a particular point at a particular time. Those jobs should be regulated and supported and the workers should be trained, and with good compensation and more stable hours, they can get retention, so that these people have experience and we can do all those jobs better.

I think that it's critical, not just again, as a moral imperative, but as an economic necessity for us to take a look at these practices and realize they're not fit for purpose in a post COVID economy, and therefore we're going to have to rethink how we organize work and how we value it and how we protect the people doing it.

You mentioned when we were talking about not having a Loch Ness Monster recovery, you mentioned the sort of post war fiscal response that the government could have. I think when people hear things like that they worry about growing deficits. One of the things that I took away from your book is that maybe that's not such a bad thing. Can you just talk about that. Are deficits bad? Should we be scared of them?

Well, I think it depends what kind of deficit and what it's for, what it's used for, and critically, how we manage it. So we do live in a new world in terms of public deficits and debt, and how we think of it and how we manage it and that new world has been here for a decade, really, since the global financial crisis. This is somewhat new to Canada, but it's not new to the world system. Even before the GFC of '08, '09, you had experience with a different approach, say in a place like Japan, which suffered a very long, hard recession, and ended up introducing the whole practice of quantitative easing from the central bank, using the creation of money through that public credit facility to facilitate government borrowing.

In fact, in Japan, they used it for other things, even buying up big chunks of corporate equities. In fact, the central bank is now by far the largest shareholder in Japanese capitalism, which is a very interesting development. So now Japan's public debt is 250% of Japan's GDP. Is that a problem? It doesn't seem to be. The old theory said they should have hyperinflation, they should be pushing wheelbarrows of money around to go and buy a loaf of bread. You'd have collapse of the financial system.

In fact, it's helped Japan deal with big challenges, including the challenges of demographic aging, and the horrible earthquake and tsunami and all the costs that came with it. So we've learned that isn't the monster that it's made out to be and now we're going to have to get used to it because we are going to have huge debt. This year's federal deficit will be 250 billion dollars, and I suggest that's just the beginning.

In fact, I think it should be just the beginning because as I argued, I think the public sector generally and the federal government, in particular, because it's got the deepest pockets, has to finance a long run process of reconstruction. That will not be a problem as long as we handle it right. The way we're doing it now, with the Bank of Canada buying up government bonds, both provincial and federal and corporate equities, and other assets is important because you're going to keep the interest rates close to zero.

They're below zero in real terms, you're going to allow that money to be created and allocated without big disruption to financial markets. The experience of other countries that have been doing it for a decade in Europe and America, and two decades and more in Japan shows that that doesn't have to be a big threat. I am worried that there may be a tendency to kind of put ideology ahead of reality and we're already hearing from some voices, that this is a calamity, debt's too big. The next generation is going to have to pay it off.

Those voices are wrong in terms of the economics, but they're motivated by using the still lingering fear of debt and deficit as a political wedge issue, to try and help them get elected. I hope that we can defeat those arguments, including with the sound economics of debt in the modern setting. At the end of the day, I think we have to show that the debt has another side of the coin.

Every $100 billion of federal debt, and the other side of it is $100 billion that was invested to help people through the pandemic and help the economy to rebuild. In that regard, more debt is a good thing, not a bad thing.

Can you expand a little bit just for clarity, because I know this is something that I've struggled to understand and I presume some of our listeners maybe have too. You've talked about quantitative easing, you've talked about the government deficit. Can you just talk a little bit about how those two things are related but also how they're not the same thing?

Sure. Well, how it's working in Canada right now is the Bank of Canada has pledged, this is new with the pandemic, has pledged to buy at least $5 billion of federal debt every week. They've pledged to keep doing that until they say the economy is well into recovery. Those are the words that former governor Mr. Paul has used, and I think that the new governor, Mr. Macklem, has reaffirmed that. That means, by my judgment, minimum two, three, four years of major bond buy.

Now that 5 billion a week is bought on the secondary market. So the bank is buying the bonds from others who already own the bonds, other institutions or investors. So, in my judgment that is neither here nor there. I think it creates, in a way, an unnecessary middleman, but the people who owned those bonds, and then sold them to the bank could totally take the money and go out and buy other bonds. So it's not as if you're really controlling the amount of debt that's going in there.

The government itself is issuing those bonds and has to. In fact, it's not a coincidence $5 billion a week times 52 is about $250 billion a year, which is exactly what we think the federal deficit is going to be this year. Now, on top of that, the bank is engaged in other activities. They're buying some provincial bonds, again to stabilize financial markets, to prevent a spike or a run on provincial government debt and we know there's some provinces where that could be an issue.

Without this kind of intervention, given the uncertainty that's ahead of us, they're buying some corporate assets. I'd like to see the Bank of Canada play a role supporting municipal finance. I think cities in a way have the hardest fiscal vise of any level of government just because they don't have the revenue tools and they're also required by law, in most cases, to run operating balanced budgets, which is a very misguided notion and right now is causing havoc at the city level.

I think the Bank of Canada could help or perhaps it's question of the higher levels of government using the funds that they can mobilize with the Bank of Canada's help and then delivering the money to the cities rather than requiring the cities to do it themselves, or some mixture of the two. So the Bank of Canada, also, this is quite unique, in Canada's case, buys a share of gun government debt directly from the government when they issue it, and it has done for decades as part of their normal debt management and monetary policy operations.

In other parts of the world, this was viewed as heresy, that the central bank would just straight up give money to the government. They viewed it as a risk that you could just get into printing money to pay for stuff. It hasn't been that way in Canada. The Bank of Canada has been very, I think, cautious in how they've done that, and now you are seeing other countries start to do that as well. In Britain, the central bank is going to do that with the government there.

So ultimately, whether it's in the primary market, directly from government or in the secondary market, buying the bonds from others who owned it before, the Bank of Canada is creating the credit, they're creating the money. They're not printing it because we live in a mostly an electronic system, but they're creating money just like private banks do when they issue loans.

By creating that money, they're facilitating the government borrowing and more importantly, the government spending, which is going to be critical to both the immediate emergency and the long run reconstruction that's going to be required. So I think it's a historic change that we've seen in the last three months, and an important one, and I'd like to see it continue and perhaps kind of be extended in the ways that I mentioned, including the municipal finance realm.

I think when people hear about money printing or credit creation, but people usually call it money printing, even though that's not what it is, that always stokes fears of inflation. I've heard so many people say exactly that with all of this stimulus and quantitative easing, we have to have inflation. Is there evidence that QE or large scale asset purchases are inflationary?

Yeah, you're right, Ben, that is a kind of a knee jerk argument and I think it comes from this long reign of a very kind of orthodox theory and practice in the realm of monetary policy, but kind of the Milton Friedman quantity theory of money approach to inflation, which says inflation is everywhere a monetary phenomenon, and it's caused by too much money chasing too few goods. That's the kind of simplistic thing that many of us were taught in first year economics. It was always wrong and it's been proven especially wrong, as the banking system shifted towards a more endogenous credit type of system rather than the old fashioned approach where a bank had to keep a certain amount of reserves with the central bank, and then they were allowed to multiply that through the fractional reserve system. That's ancient history, that doesn't exist anymore. We've got a whole different banking system.

Sorry, I don't want to interrupt you, but can you dig into that a little bit more? Because I think that is a massive misunderstanding that people have.

Yes, it is a massive misunderstanding. One thing that's been interesting in the years since the GFC, is even mainstream economists have come to grips with that massive misunderstanding. For example, in I think it was 2013, 2014, the Bank of England issued a kind of technical working paper that was surprisingly frank, in its description of how credit creation actually works, and was explicit that what most people are taught in first year economics about the fractional reserve system and a bank collects money from depositors, and then has to keep a share of that money on hand, either in its own vaults or with the central bank, but then can multiply the loans that come from those initial assets, as long as there's not a run on the bank, that's the story we were told.

I remember thinking of that when I watched the old Mary Poppins movie. I don't know if you guys saw the original one, not the new one, where Jane and Michael Banks go to the bank, their father's bank and accidentally start a run on the bank by demanding their tuppence back so that they can feed the birds. That was kind of the model and runs on banks can still happen. We saw it happen, but they don't happen like that.

They happen because other banks won't lend to a bank, and it's not a question of getting a certain number of deposits and then multiplying the loans. In fact, the loans come first, a bank creates money when it issues a loan. This is how the private credit system works. It's not just about government's QE. This is how banking works. They create money when they issue a loan, there are certain capital requirements and they have to, in theory, stabilize confidence in the bank's ability to do this on a long term basis.

Those capital requirements are pretty loosey goosey, frankly, and do not ensure stability, not remotely. The central bank monitors it and is ready to step in with huge amounts of its own created money to stabilize the system when it's required. So there is, I think, a better understanding now of how banking actually works and I think that that will help people wrap their minds around what the central bank is doing. There's lots of things that cause inflation.

The amount of total money in society can be a factor, there's no doubt about it. So this is why you watch credit creation indicators as a sign of what's happening, both in the real economy and with inflation. Remember, the quantitative easing that we're seeing from the Central Bank and the money that's created with it is not even offsetting the money that's being destroyed through the contraction of private credit, because of the downturn and the loss in incomes and the canceled investment plans, and so on.

So on the net basis, the total amount of credit in the economy is not going anywhere. There's huge excess capacity in industries, and that combined with competition, is going to keep a lid on prices. You have seen very weak indicators from consumer prices from wages and other things. So the idea that this will inevitably lead to inflation is wrong, both by looking at the current macroeconomic conditions, and looking at the experience of other countries that have been doing this for decades, and still haven't ended up like Zimbabwe.

So it's not to say that you can't end up like Zimbabwe, you can, but what the central bank is doing now has nothing to do with that.

It's fascinating, and it's so contrary to I think what a lot of people perceive it as. One other question on quantitative easing. You talked about the interaction between the federal government bonds in being purchased through the central bank. One of the things that I hear a lot about quantitative easing is that it's intended to prop up, and usually, this is about the Federal Reserve in the States when people are talking about this, but it's designed to prop up asset prices, to prop up stock and bond markets. Is there any truth to that? Is that what the central bank is trying to do?

Yes, I think that is, there is some truth in that and that is a good thing to limit. I would say it's not necessarily the main goal. It certainly shouldn't be the main goal, but I think it does influence the central bank's activity. You've certainly seen that in the case of the US fed. They monitor what equity markets are doing, and it influenced how they tried to unwind the initial quantitative easing that they put in place after the global financial crisis, and certainly motivates what they've been trying to do in the current pandemic and you've seen the asset market responses to it.

After all, you've got a central bank that's creating, in America's case trillions of dollars of money, out of thin air through quantitative easing and using it to buy corporate assets. So in a way, it's no surprise that the NASDAQ is at a record high. Why on earth should a stock market be at a record high amidst the current chaos that prevails around the world, and in America in particular? So something's askew there. Same goes in Japan, where they've been doing quantitative easing for a quarter century and where the stock market is now reliant on continued injections of central bank created money in order to preserve their equity assets.

The central bank and the government justify this as saying, well, by keeping equities high, we reduce the cost of capital and we stimulate more real investment by those companies. That may be true to a certain point, I think there's more effective ways to do that. The point you raised, Ben, also has an important relation to inequality. Because of course, if one of the main outcomes of quantitative easing is an inflation of asset prices, well, that's going to have negative impacts on inequality because who owns most of the stock market? Of course, rich people.

This is why I got a PhD in economics, Ben, because I can say outstanding things like most wealth is owned by the wealthy. That's just an amazing thing. So the reality of this quantitative easing, to the extent that its main impact has been felt in the asset markets has been a widening of inequality in America and some other places. So this is again, part of my argument about why I think the whole approach of the Bank of Canada needs to be maintained, but also extended and strengthened.

I would like to see more of the focus put on using that money, not to buy corporate assets in the secondary market, but to directly facilitate investment and economic activity by both public and private sector players. I think that that is in a way, a more direct and powerful way to use the tool of credit creation to help the recovery and would help to avoid some of those side effects on inequality and so on that could arise from a bubble in stock markets and other asset markets.

Wow.

I'd like to shift gears just a bit, Jim. Clearly, this pandemic has a huge impact on the GDP. Part of your book that I really enjoyed was where you talked about different ways of measuring the health of an economy. Can you talk about those different ways, as opposed to strictly GDP?

Yeah, that's an interesting area. I've got a lot of sympathy for people who say the GDP is not a good measure of how well you're doing. The GDP, at its simplest level is just adding up the value of all of the goods and services produced in the formal part of the economy, and it's a tricky exercise to do, but just because you're producing more, doesn't necessarily mean you're better off. It depends on what you're producing and how it's used for. There's lots of ways also in which GDP misses important aspects of our economy.

It does not include the value of unpaid work, for example. That includes the caring work that goes on in our homes, disproportionately performed by women, or our communities or volunteer work, and it doesn't pay enough attention to the value of natural assets. So it doesn't take account of the damage we do to the environment as we produce stuff. So for all those reasons, GDP has to be treated with great caution.

You should never interpret growth in GDP or growth in GDP per capita as a sign of how well you're doing. All that being said, I don't agree with those who say we should just abandon GDP as a measure. I think it is a relevant and important story that GDP tells the monetary value of all the goods and services produced for money in the economy and it's something that we need to know affects all kinds of things, including government revenues, for example, which go up and down with nominal GDP very closely.

I also disagree with those who say that just by abandoning GDP as a measure and adopting something else, like you could develop an index of social well being and lots of researchers and economists have tried to do that. I think that's a useful exercise, but just changing the measurement doesn't mean you're going to change what's actually happening in the real world. That's, I think, very naive. Our economy is not operated or managed to maximize GDP.

Lots of people make that assumption including a lot of well-meaning environmentalists. That is not how our economy runs. Our economy is a by and large business dominated for profit economy and there's lots of ways in which our economy right now is antithetical to growth, including some of the influences on private corporate behavior and decision making that arise from things like wanting to pay out spare cash to shareholders in the form of special dividends or share buybacks, rather than accumulating capital and creating jobs. No one gets to be a CEO anymore by saying, my goal is to grow as much as we can.

They get to be CEO by saying My goal is to deliver as much wealth to the owners of this company as I possibly can and the CEOs are rewarded handsomely for doing that. So I find the criticisms of GDP I think, to be valid, but we should be cautious in how we use GDP as a measure and don't expect that by changing the measure, we somehow change society. There's much deeper structural and power relationships that determine how the economy is unfolding. Not just one particular measure.

We've talked about wealth distribution a couple of times, and again, your book has so many wheels turning in my brain that weren't turning before, but anyway, that's a separate topic. People should read your book. Everybody should.

A beer for you, Ben, when we get together too. One for Cameron, one for Ben.

The incentive was not necessary. I would have said that anyway. The PBO, the Parliamentary Budget Office in Canada just released a report that I saw that says that 1% of Canada's wealthiest households own 25.6% of the country's wealth. How is Canada doing in the global landscape in terms of wealth distribution?

Yeah, I saw the coverage of that report, and I haven't yet dug into the report. I want to, to take a look at it. I actually think that understates the problem to be frank, because I'm pretty sure that the PBO is including housing wealth in total, including the value of your own residence. I just think that's misleading. I know if you live in a trendy neighborhood in downtown Toronto, maybe you think you're a millionaire because you own a house that's worth a million dollars, but guess what, it's still just a roof over your head and its significance both to you and to the economy as a whole is very different than how we think of, what I would call financial wealth or disposable financial wealth.

So, when I have tried to look at wealth distribution, which is an important topic, I try to strip out the value of home residences, and you get very different numbers. By that standard, the top 1% in Canada probably owns 35, or 40%, of all wealth. So if anything, the problem is even worse. Wealth is distributed far more unequally than income. We keep an eye on income and the gap between high income and low income people and we try to moderate it a bit through our tax system and so on. Wealth is much more unequal than that, and in a way, it shouldn't be surprising.

The reality is that most wealth, including most business wealth is owned by a really surprisingly small share of society. That gives rise to, I think, a lot of problems and how our economy works and how our society works because that, by my reckoning, roughly 2% of people in society who have enough wealth that they don't have to work. They could live off their own wealth. Many of them do work, but they don't have to, and that's a big difference.

That 2% just carries so much influence through our media, through our culture, through our educational institutions, through government, and, of course, directly in the economy, because their investment decisions determine the economy develops and where it develops. I just think there's lots and lots of problems with that. So understanding, first measuring and understanding the distribution of wealth and what it means, and then hopefully taking some means to redress that, perhaps by sharing the wealth a bit more through something like a wealth tax that some have proposed, or perhaps by regulating how wealth is wielded in society and trying to channel it into things that are more broadly beneficial, rather than just what that 2% want to play on, I think will be really important.

In Canada, many of the biggest companies are in energy and banking. Is there something that Canada should be doing to ensure that all these people have work in the future? Is there a risk of having an economy that's only concentrated in a few sectors?

There sure is Cameron, and that, in a way is a legacy of our colonial history. The fact that resources sector and the banking sector are, in a way the brightest lights and the strongest pillars of corporate Canada. Our economy is much bigger than that, but because of our legacy versus a British colony, and then it's kind of an American branch planned, the Canadian corporate sector, I think, is distorted still, and too narrowly focused in those industries, which, partly by accident, and partly by design, Canada has a good foothold in.

We have very strong banks and a very big and strong financial sector because government wanted that to happen and they created an environment right from before Confederation where banking had to be done by companies that were based and homed here. We still have extensive protections on the banking system against mergers and takeovers, limits on foreign ownership and so on.

So banking has been a protected industry, a heavily protected industry with a strong focus on developing a Canadian indigenous banking system and to some extent that's been beneficial. Although I think the banks themselves are too self interested and should be held to stronger account around issues about how they use that wealth in our economy.

Mining and energy, particularly I'm sure you're thinking petroleum, have been developed here, I guess partly because of our geography and our immense riches of these things. Then, to some extent, not a total extent, to some extent, a strong Canadian ownership piece of the mining sector and developing expertise and running mining companies and some of the services and functions that go on with it. Canada is a leader globally and mining services and some of the more innovative aspects of that and Canadian companies are, of course, in places all over the world with their own investments, sometimes with very, very unacceptable practices, environmentally and human rights in that.

In much of the rest of the economy we tend to be dependent on, still on foreign investment and foreign innovation. I think a fundamental challenge facing Canada, particularly as we confront the climate constraints on our energy system and our economy, we know that fossil fuels have to phase out over the next two to three decades. So why on earth would we want to see a dying industry as a leader in our future economic development? That would be a travesty and just a deeply mistaken approach.

We're going to have to develop other industries and hopefully, indigenous industries in the sense of coming from within Canada and Canadian expertise and Canadian firms to supplement those two traditional pillars of our business sector. I used to, every year when the financial post came out with his top 500 Canadian companies list, as a joke, except it was a sad joke, I would go through and count how many of the top 20 were either financial firms or mining and energy firms and it was always a strong majority.

It meant that we didn't have And domestic business capacity in other areas like value added manufacturing or science and technology, digital economy, even retail. We can't even get a good strong Canadian owned presence in retail anymore, and even Tim Hortons isn't Canadian anymore. So it shows you how, I think narrow and precarious our economy is for all of those historical and structural reasons. I think addressing that by nurturing a broader portfolio of homegrown, high value sustainable industries should be a priority of our national economic strategy.

Well, luckily, as of today, I believe we do have a leader in technology and retail with Shopify being the largest company in Canada. So that's a good new story.

Well, yes and no, because I've been around the block a few times and the problem with the stock market and how it values things is it gets carried away on its own Kool-Aid. So just because you're very, very, very, very valuable on the stock market, great news for Shopify and what they've done. It's a great success story. There's no way it's truly the most valuable company in Canada, just like Nortel wasn't, and just like Blackberry wasn't. So without saying we should short anything here, what goes up will come down, and the latest digital fad shouldn't be what we make our value judgments on.

So on the stock market, Cameron and I give people investment advice. That is our job. A common thread of our advice is always we should invest in index funds, because index funds are ultimately just a bet on capitalism, which seems like a pretty good bet and it's paid off for the last, whatever it is, 250 years. In your book, you talk about capitalism being, in the grand scheme of humanity, pretty short lived, and the fact that there's a good chance that something else will replace it at some point. What does that look like? Assuming that we progress into something that isn't capitalism or some other version of capitalism. What does that transition look like for the concentrated group that owns the wealth now?

Oh, wow, Ben. That is a big question, a philosophical question and one where the usual proclivity of economists to get out a crystal ball becomes even riskier. They say, actually an economist were invented to make astrologers look good. So that's true in regards to picking winners on the stock market and guessing the next GDP quarterly result, but it's especially true imagining a big question about how society is going to evolve in the future.

I say things like that in the book, partly to troll the conventional wisdom, that capitalism is a natural and permanent state of affairs. There's a certain view to these things that this is just human nature, and how we relate to each other by buying and selling or trucking and trading, as Adam Smith put it, is just how we are and it's the normal way to be.

I always try to provide a historical perspective on things just to remind people that it hasn't always been like this. I think it would be folly to assume that how we do things now is how we're always going to do them, and I also think it's folly to think that you can predict how and when and where those big structural changes are going to occur. I tend to think it's not going to be in a single dramatic moment, I tend to think it's going to be through a process of decades or, who knows, even centuries of grappling with problems that are hard to solve, and then eventually finding ways to organize work and life better.

There'll be lots of hardship and uncertainty and probably conflict and hopefully not war in that process, but it will happen, I think, and it will happen in surprising ways. I mentioned earlier, the fact that the Japanese central bank is the biggest shareholder in the Japanese stock market. Well, think about that for a minute. A public institution, using money that it creates out of thin air is buying up capitalism.

Now they're doing it with a certain goal. I won't say that their closet Bolsheviks' running the Bank of Japan, but they are acting in a way that's changing the structure of how our economy works, not just in terms of dollars and cents, but also power and etiology and legitimation. Other places, I'm fascinated with how they run things in Singapore. I'm not saying it's a perfect model or anything. There's lots of issues and problems there, but they've got this hacktivist use of sovereign wealth as a tool of economic and industrial development that I think they've been very sophisticated at doing.

Lo and behold, using these publicly owned capital vehicles in an interesting symbiotic relationship with privately owned companies, they've been remarkably successful at developing a high tech, innovative, flexible economic system and there's big sort of social pieces to what they're doing there. Then lots of other examples from around the world that I talk about in the last chapter of that book about how I don't think there's a roadmap and anyone who tried to say they had a roadmap would be lying.

I think there's lots of seeds out there about different ways of organizing work and production and distribution that are fundamentally different than the supposed market driven business led system that we live under today. So I'm in interested in those things. I doubt that any of them will really change the world that we live in within our lifetimes, but I'm also convinced that we need to think bigger and experiment. In addition to trying to fix some of the immediate urgent problems of our system today, we should also be thinking about a totally different way of doing it.

Very interesting. Cameron and I get buying this podcast, most of the time without a whole lot of political discussion and our conversation with you today has had more politics involved than probably in any past episode. Why does economics, macroeconomics, the type of economics that we're talking about, why is it so political?

I think it's a natural fit. In fact, some of the places I studied economics, it was actually called political economy. In fact, it was Adam Smith who invented the term political economy. Adam Smith's supposedly the father of capitalism, and it was because of a reflection that the economy is a social process, first of all, as we were discussing earlier, Cameron, and a process where social structures and code classes and vested interests and social conflict and governance, and hence politics, politics is about all of those things, were direct relevant inputs that helped shape how the economy works.

So part of the interest of the early classical economists, Smith and Ricardo and so on, was precisely to make arguments that would undermine the vested and in their view, unproductive power of the sort of remnants of the medieval landed gentry, this group that was just entitled, and had all this wealth but used it very uselessly. So they developed an economic model and economic policy recommendations coming from that model that were aimed explicitly at reducing the power of the aristocracy of the landed gentry and replacing it with what they saw as a very innovative, productive, dynamic and positive force.

These new individual businesses and capitalists in first the merchant area and then the industrial area. Frankly, I think there's a hell of an analogy from that to today. If I was to talk about a entitled elite, with lots of money, doing almost nothing with it, I would look at that concentration of financial wealth among that very highest, richest share of society and how unproductively they are using it.

They are not investing in dynamic capital accumulation of the sort that Adam Smith and David Ricardo celebrated. They are absolutely sucking it up and consuming it and buying back shares and paying out enormous dividends and living a rich elite lifestyle and building the modern day equivalent of pyramids. So in that regard, I think it's natural that economics undertakes an analysis of who's who in society, who's on top and who's not, whose decisions and interests are being privileged and how, when necessary, can all of those things be challenged.

I think that economists who pretend they don't do that, they're sometimes called positive economics, who are supposedly just the technicians looking at supply and demand and staying away from the normative dimension of it, are lying. There's no way you can just look at a supply and demand graph and say that's just a technical relationship. There's social relationships and power and assumptions built into every supply and demand graph that you see. So we might as well be honest about the loaded and contested political content of our discipline.

Very interesting. So for our last question, and for a change, I've two parts to it, because so much of your career, and so much of what we talked about is about a better future. So I'm really curious, how do you define success in your career, and also outside of your career, how do you define success?

Oh, wow, that's a very thoughtful question and very personal as well. Of course, I often think I'm just incredibly lucky and fortunate to have been able to develop a career that was so aligned with my personal values and beliefs and hopes. So I frankly, I went into economics as an undergrad at the University of Calgary, by the way, and I actually studied there, believe it or not with Stephen Harper, who was doing his master's there when I was finishing my undergrad.

So there you go, we somehow fell on opposite sides of the tree, but I actually went into economics, because I was already a sort of, I guess you'd say left wing activist involved in different causes. I thought that economics held great potential for making strong arguments about how society could become better, more equal, more environmentally sustainable and more peaceful. I was really involved in the peace movement then.

That was my motivation to study economics and I've never regretted that for a minute. I do believe that economics has a unique ability to make contributions to how we think through those issues and how we solve them and in the sort of day to day battle of ideas, rightly or wrongly, actually, more wrongly, economists are afforded just a greater platform and greater respectability than anthropologists or architects or social workers.

So in a way, it's been a very good choice that way to try and have an influence on debates and have an influence on policy. So I've worked in a number of spheres, I worked in government, various think tanks, I worked in the union movement, of course for 20, some years, now back in the think tank world. In every case, I was able to use my capacity, my talents, my creativity to try and advance things that I totally, totally believed in.

I know enough people who aren't in that situation, who just do a job because they asked to, and they do what they're told, or worse yet, do a job that they don't believe in and I know how lucky that is. Personally, of course, my greatest hopes and dreams relate to my family and making sure that they're well and that I'm with them and a part of their active lives. Obviously, I got two kids, young adults, both worried as hell, what the world is going to hold for them, including the labor market.

So part of what I'm doing is for them and for every other young person coming along, giving them a fair chance at life that they can lead free of economic deprivation and fear and environmental destruction and war. These days, that's a big ask, but we'll hope that we get there for them.

Well, Jim, this has been an hour very well spent. It's been great to get a chance to meet you and hear your perspective. This has been fascinating, and again, thanks for your book. It was a great read. Thanks for your time today.

Thank you for your interest and for buying the book and reading it, and mostly are obviously your contributions to an informed and positive discussion in Canada. Thank you.