What’s the time, Mr Wolf?
By CA magazine
27 January 2021
Martin Wolf CBE, Chief Economics Commentator at the Financial Times, has been described as “the premier financial and economics writer in the world”. He talks to Lysanne Currie about life post-Covid, Brexit and the trouble with stakeholder capitalism
Martin Wolf, one of the world’s most respected financial journalists, has had quite the intellectual ride. From being an active supporter of the Labour party until the 1970s to an enthusiastic proponent of globalisation and free market economics in the 1980s, when he was Director of Studies at the Trade Policy Research Centre, and back again to his original Keynesian position by the time of the 2008 crash. Since 1987, he’s been writing for the Financial Times, using his platform to share his views on subjects including public goods (the building blocks of civilisation, knowledge, science, sustainability, trust and financial stability, he says), the Covid-19 pandemic and Brexit, on which he does not gild the lily.
We chat, via Zoom, of course, the morning after the latest lockdown was announced. What does he think this latest setback will do to the economy? “It depends on how long it goes on,” he says, “which at the moment is totally uncertain. If they can get to two million vaccinations a week, by the end of February the number of people who will need hospital care, and are likely to for a long time, will have fallen very sharply. We should be able to begin to get back to something closer to normal [within a couple of months]. If that’s the case, the further hit to the economy will be substantial – but the recovery could be very strong. However I don’t expect output in this economy to return to pre-crisis until well into 2022.”
And while it’s going to be expensive, he says, the government has no alternative but to continue to support business and workers. “I’ve always regarded government as our insurer of last resort,” he says. “That’s what government is for, to deal with national crises like wars – enemies, as it were. And a pandemic is a first-class example of a national crisis. So yes, I expect the government to do whatever it can to maintain our people and our economy.”
Turning off the tap
Wolf stresses it’s vital to understand that what is happening is unique in human history in terms of our response: “We’ve suffered from much more destructive and dangerous pandemics in terms of morbidity and fatality. Compared with the Black Death or the Spanish flu this is a relatively mild pandemic. But what we did has no precedent: we decided to close down our economies. The decision by people to work from home is something we could do for the first time, to allow businesses to reorganise themselves.” In this way, he says, “it’s a completely different recession. We’ve turned off the tap, brutally. Last year’s GDP decline is substantially bigger than any financial recession since the Second World War or the Great Depression.” However, there’s still scope for optimism: “It may be the most severe shock we’ve experienced since the war, but it mightn’t have such a long-lasting effect.”
Of course, some businesses have done better than others. “In a big recession, you need a strong market position, a strong balance sheet, high-quality management, highly flexible capacity to change your business and be resilient and risk-robust,” he says. “[But] you only discover this when you hit a wall. You have to be the supplier that people will be most willing to cling to in a crisis. There’s a famous remark by the US investor Warren Buffett, that it’s only when the tide goes out that you discover who’s been swimming naked. And it is absolutely true. The most important thing is to be in the right business, and a lot of that is luck. In this case, the lucky businesses were the online ones.”
Wolf used to agree with Milton Friedman that the pure purpose of business is profit, an issue on which he has since performed a volte face. He explained why recently in the FT, although he believes the concept of stakeholder capitalism has its own complications. “When I buy a piece of clothing, I would like to know it’s not being made by slave labour or child labour,” he says. “And it seems to me perfectly reasonable to ask major companies to meet basic moral standards in their supply chain. Much more difficult of course, is internalising some social or environmental objective, alongside profits.”
The problem, he thinks, is it implies business should play a bigger role in politics, “which I find very unsatisfactory. I’m very clear in my mind that I would like business as far as possible outside the political process. And I am not quite sure we can make the stakeholder version work. It invites businesses to become more active politically – they’re not. And here I do agree with Milton Friedman: nobody in business should decide how our society should be run, they have no political legitimacy. They exist to produce stuff. The second problem is the issue of who ultimately controls the company. If it’s ultimately controlled by its shareholders, there’s a limit to what business can do in the way of pursuing other aims.”
If this is to be achieved at all, he thinks, “then you have to start thinking very, very seriously about the organising principles of the firm. That’s what Colin Mayer at Oxford has been trying to do. That’s really radical. It’s not something you bolt onto the existing model. Transparency is good and meeting basic moral standards is good. It will probably lead companies to being better managed on the whole. But changing companies, so they actually trade off these different objectives… within the shareholder control model, I don’t really see how this will work. And it can only be done, I think, if we are prepared to accept a fundamentally different view of the firm.”
Life after Europe
Speaking of fundamentally different viewpoints, Wolf doesn’t mince his words when it comes to the “B” one. “I can’t understand any of this,” he says of the UK’s decision to leave the EU. “It’s completely incomprehensible to me. I think the whole thing is crazy.” So what does he predict for the future? “There will be a shift of business from London to Europe,” he states. “I expect a significant proportion of the City’s activities to go to Europe. And of course, the deal, which I regard as a pathetic and paltry one, excluded all our most important industries. The government basically decided to throw the City under the bus in order to protect fishing, which has no significance at all. Go figure. I think there will be a fair amount of damage to the financial sector. It will survive for sure, and it will have to change itself. It’s very innovative and creative. I don’t think London’s position as the dominant financial centre in this time zone will be affected, but it will shrink.”
His forecast for the manufacturing industry is predictably not great either: “It will get more complicated because bureaucracy will impose costs. And I’m not completely sure the supply chain won’t be permanently affected – many British firms were part of integrated supply chains across Europe. I’m concerned the delays will become structural. And it seems to me that, over time, European partners will say, ‘This is too much trouble. Let’s do the next deal with Slovakia or Poland or Italy.’ So I think there will be a short-term shock, which is attenuated because our economy is being closed down anyway, so it won’t be so evident. And then there will be a longer-term shift, as we lose the benefits of being integrated with the European economy, which in my view were substantial in finance and manufacturing. Everybody knows distance matters – it’s one of the most fundamental propositions in trade.”
Still, a US trade deal might be easier with Biden in the White House, right? “Biden thinks, as I do, and as Obama did, that our decision to leave the EU was crazy. Trump liked Brexit, but the disadvantage was, he didn’t much like trade. The advantage with Biden is, if he reaches a deal with the UK, it is very likely the Democrats will support it. And the Republicans are likely to support it, because generally, they’re quite pro-UK. While Biden deeply regrets Britain’s departure, he wants Britain to be close to Europe, and close to America. He doesn’t want to lose Britain as a significant ally. And although he probably wants to do well with the EU even more, the question in the end is how much he’s got on his plate. The challenges he faces are so huge. The question is: what are going to be his priorities? Refurbishing and recreating the western alliance is an important priority for him. But healing America will come first of all, and rightly so.”
As always, and as Wolf knows only too well, watch this space.