MIKE GREEN: Mike Green. I'm here for Real Vision, sitting remotely in Marin County and getting to talk on the other side of the country with one of my good friends, Sri Thiruvadanthai. Nice to see you, Sri.
SRINIVAS THIRUVADANTHAI: Nice to see you, Mike.
MIKE GREEN: Now, we sat down in New York City at possibly the last possible moment right before the world shut down for coronavirus. When we spoke and that was actually interesting because one of the things, the shutdown meant that the editing took a couple of months, took a couple of weeks before it was able to make it out to the viewers. We were watching what was going on. We were seeing markets collapsing. We were seeing the world start to shut down in response to the coronavirus and we were seeing extraordinary claims around the rates of infection, etc. The world's first changed very radically since. If you and I were to sit down, if we had sat down knowing what we know now six months ago, five months ago, what do you think we would have said differently?
SRINIVAS THIRUVADANTHAI: Okay, let me try to answer this in two ways. One thing is the consensus of the speed of the policy reaction. To some extent, I always think that in a crisis, people always get their heads together, that sense still they got it, not only got it together, but the scale of the intervention, especially in the US, has been enormous. That's number one. Number two, I would say is the resiliency of people, which I generally think is always true, otherwise human beings wouldn't be surviving but it's always surprising how much resiliency there is when you look at the reaction and how people have adjusted to the virus and the second round of the renewed resurgence in virus doesn't seem to be evoking the same response both in the markets as well as among the people.
MIKE GREEN: I would certainly agree with that, particularly the resilience component, that people adapt. That's basically a very simple definition of how humans tend to differ from most other animals. We adapt to the environment in which we exist. When you think about why people have been so resilient, how much of it do you think has been a function of the idea that this was temporary? That this was a short term film.
SRINIVAS THIRUVADANTHAI: Well, I don't know. The thing is actually not seeming to go away. I do think that eventually, we will get a handle of it, but people are just, do it. This is what I always think of, looking back 50, 60 years ago, before there were vaccines. How did people deal with measles, or smallpox or whatever, all those things that were there? It's not like people locked themselves up. They just dealt with it, which is not to say that we should completely ignore everything and just do what we have to do, but people went about their lives. I think here in the bond world, we have a feeling that we can control everything, but there are limits to how much we can control. Surely, we can control, this is not how we dealt with it 50, 60 years ago, people just went about their lives.
MIKE GREEN: It's funny, because it's not even how we dealt with things 10 years ago. 2009, we had H1N1, I believe it was when H1N1 came through, similar global mortality rates, radically different response. To me, the most interesting thing that's happened is the response itself. I agree with exactly what you're saying. You and I both had a very similar reaction when we saw the speed of the policy response. We were both-- and I'm certain that you at the Jerome Levy Institute were involved in discussions with officials. I know I was having conversations with officials and emphasizing the need to rapidly replace the lost income and we should come back and talk about that context of the Kalecki equation.
The broader response in terms of the control dynamics has, to me, been fascinating. To see people, see the control of their daily lives in the way that they have is a remarkable event. The fact that we no longer send our children to school, that we were moved into a homeschool environment, that we weren't able to go to work, etc., we changed so rapidly as a society. I just wonder if we were not, relative to the response 10 years ago that we might have had, I wonder if we're being effective in training for that?
SRINIVAS THIRUVADANTHAI: No, I think that is true. I think part of the thing is that modern society makes coordination possible, but I think there is an element of neurosis also, to some extent, I don't want to be a social psychologist here, but I think we tend to value-- we can think of it in a positive way that we tend to value life more than we did 50, 60 years ago. We have much less cavalier about loss of life. That said, we also think that this is a version of helicopter parenting, and that we can micromanage every single thing, that we can completely control the risk. There are some risks that are there and we have to balance the risks with the unseen risks of trying to do this complete shutdown, which obviously throws lives of a lot of people.
This is especially true in poor countries like India, where, okay, you shut it down. Fine, but looking at it from the microscopic 1%, 2% of the middle class people who can afford to work from home, but you have tons and tons of millions of migrant workers and things like that whose life was thrown in jeopardy. Poverty is a silent killer. You don't see it directly, how it's going to affect all these people, their lifetime outcomes, their children, nutrition, malnutrition, all that, we don't know. Yes, there has been some replacement of income far better than when I was growing up in India, they have done a better job, certainly. Nonetheless, the lives have been thrown off the rails and how is that going to affect the long term is unseen risks that we are not counting, whereas we are counting the lives that we are saving right now, potentially.
MIKE GREEN: Why don't we do this? Why don't we split this into two separate components? Because you've written some really interesting stuff talking about the importance of the income replacement. Obviously, you and I have talked at length about the dynamics of the Kalecki equation and so very clearly seen as income or cash flow replacement associated with unemployment insurance. You put out a tweet the other day that was highlighting that retail sales have actually recovered two levels above where we started in the pandemic. Can you expand on that?
SRINIVAS THIRUVADANTHAI: If you look at the retail sales, and especially spending by the bottom 40%-- bottom 40%, 50% the people, it's actually higher than it was before the pandemic. Because what has happened is remarkable. We have had this deepest recession and job losses since the depression, and yet personal income, disposable income is higher than it was. Because you have replaced, the government has been successful in replacing more than the lost income. I think University of Chicago had a study that they said like 68% of people on unemployment will actually make more money being unemployed than when they were working.
There are two things this tells you. First of all, the enormous power of the government, fiscal policy. Number two, it's also telling you what happens when you give money to the people who spend most of the money, whose propensity to consume, marginal propensity to use the jargon, is very high. You're giving it to bottom 40%, 50% of the people who tend to anyway spend most of the money. In fact, they have a negative savings rate typically, so you give the money, most of it gets spent. In fact, JP Morgan instituted a recent study that said all this extra $600 per week that people were getting, they were spending nearly 70% of it. I think that's a lowball estimate. They were probably spending more than 70%, 70% of it. That's where the power of [?].
From the Levy Kalecki equation, this is what's happening. You have the corporate sector, they're cutting wages. Normally, most people from the micro perspective think that, okay, cutting wages is good for corporate bottom lines. That is true for an individual firm but when there is such large scale layoffs, what happens is every person's income is another firm's wages and other firm's income because people spend that money. When the corporate sector as a whole cuts employment, it's usually we have recession. We don't have booms. That's not when profits go up because people got wages and then you have a vicious cycle of companies then cutting capital spending and so on and so forth.
What we have done is we have neatly cut off that vicious cycle by replacing all that lost income with more than that by government spending. Now, all those people can spend going back into the corporate bottom lines, which is why the decline in profits in the second quarter is not going to be nearly as drastic as it would have been had there been nothing. Had there been nothing, profits would have been wiped out in the second quarter. Corporate profits would have been wiped out.
Just to give you an idea, if you look at fourth quarter of 2008 when the GDP decline was 8% or 9%, we had almost like 50% decline in profits. Something like that, I'm speaking from memory, I might have been wrong on that exact number. We are not going to get-- here, we are going to have a 25% to 30% decline in GDP. That would mean profits would completely get wiped out but we have not had that and you can see the earnings revisions are going up. It's largely because of the replacement of income.
MIKE GREEN: This is one of the things that we talked about in the paper that I had written, the Policy in the World of Pandemics, that the response was so large, and it was coming from the public sector, that that would naturally flow into the private sector. Effectively, we wouldn't know exactly how that would come through. A criticism could be leveled, saying that, well, only 70% of the stimulus was spent. Savings rates have risen dramatically, but as you pointed out, it's probably significantly higher than that for the income constrained and ironically, because the corporate sector was able to cut wages and able to unemploy people for the most part, you saw a simultaneous expansion in the corporate profit component. That was particularly concentrated in the larger companies. Microsoft, for example, announcing fantastic earnings. When you think about that dynamic, why don't they just do that all the time?
SRINIVAS THIRUVADANTHAI: That's a good question. I think this is the quick [?] anybody asked and then a lot of people are assuming that they will do whatever it takes now that we are past some Rubicon and everybody is now an MMT-er. I don't think everybody is an MMT-er. At the end of the day, it's easy to get consensus on these things when you are faced with an existential crisis. It's hard to get consensus when things are bad, but not as bad. Like look at right now. How much wrangling there is about extending the unemployment benefits and things like that? Maybe push comes to shove, they will do it. I don't know.
I think generally speaking, if you go back even to 2008 and you look at that was a huge crisis, but the talk for the stock market bailout got voted down. That was some 700 points or something like that. I think there is an inherent conservatism, let's call it, conservatism is the wrong word. I don't know, establishmentism is a better word, in doing things the way we have don for some reason, and there's good reasons for it because those things have worked for 200, 300 years in our case and longer in the UK case. I think we have to be humble to some extent. Even though I'm sympathetic to MMT, I come from a very post-Keynesian view. At the same time, there is something to be said for not discarding some conventional wisdom, even though they're may be logically wrong, there might be something beyond our logical framing.
MIKE GREEN: Well, and you and I have talked extensively about MMT and the dynamics behind them, and I think we both come to the conclusion that MMT is true. It is an accurate description of how the system functions but it's not prescriptive, it doesn't actually tell you what you should do. The way that you choose to spend the resources of society, and that's what the government really has, is a claim on the resources of the people who are citizens and are workers, etc. How we choose to reallocate or spend those is important. If we were just to decide to give everybody season's tickets to the Mets, won 29 out of 30, teams would be disappointed, but it would affect the outcomes that we have as a society.
SRINIVAS THIRUVADANTHAI: Yeah, I think there is right. See, there are two things, this is a phase change thing. In the current phase that we have been in for last 20, 30 years, where globally, there is a huge amount of slack, which gets called as global savings glut, which is a very wrongheaded word in my opinion, because it's wrong. The savings are not the driver. Whatever it is, we had a slack and disinflationary, deflationary tendencies over the last 30 years. In that environment, the MMT paradigm is right. There are no real resource constraints to spend it, but if you take it to its logical conclusion and let's say spend $4 trillion every month, the government does, some such number, some huge number and then we actually take it near the resource constraint frontier at some levels. Then the resource constraints start becoming binding, the world changes when the resource constraint starts binding then it becomes more like the monetarist world, it no longer is MMT world.
The question is how do you manage that world? A lot of our systems are put in the to manage that world to some extent, and it is wrong for this, the world that we are in. It is true, but when you go to that world, can you easily shift back to doing the policies that are right for the world? That's the real challenge. If you go back to the debates in the '60s and '70s, that was really the issue, although it comes from really wrongheaded framing by the monetarist. The question is, can you easily switch back to anti-inflationary policies when you do that? That's where the inherent conservatism comes because people are afraid of letting the inflation genie out of the bottle. Not because of the '70s per se but even historically, there is a reason for why-- what's his name? David Hackett Fischer. Fischer has this nice book called, Price Waves.
MIKE GREEN: The Great Wave, yeah, The Great Wave, [?].
SRINIVAS THIRUVADANTHAI: How inflation has been associated with lots of bad things. Now, I don't think inflation was per se the driver, it is broader social reasons why these things happen. The fact is, the collective societal memory of inflation being associated with bad things is certainly one of the things that puts in place these guardrails.
MIKE GREEN: This also touches on an area that you and I both research, which is the dynamics of demographics. One of the statistics that I often quote for people is just how different the 20th century was from the 21st century. The example I always give people is at the start of the 20th century, there were roughly a billion people in the global labor force. At the end of the 20th century, there were roughly five and a half billion people in the global labor force. Over the course of the 21st century, we're going from about five and a half billion people to most estimates are about 6.2 billion people in the global labor force. It's just not even-- you can't even attempt to compare the two centuries in terms of the likely outcomes for aggregate demand growth.
The story of the 20th century by and large, was one of continuous expansion of the demand frontier. A variant of Say's Law, you expand the labor force, what you're really doing is you're expanding consumption. When you think about the 21st century, it's very modest growth, much more akin to what populations did in the 19th century, the 18th century, etc., where we had real constraints created by disease, and accidents and illness and all sorts of stuff that kept a limit on human population. If you think about what we've done here, where we've effectively done something very different than what we did in 2008. In 2008, we propped up the production system, we tried to prevent corporations as much as possible from going bankrupt or coming offline by cutting interest rates, etc.
This time around, we've taken a different approach where we've shifted the demand frontier outward, and this goes directly to your point about the expansion of retail sales. We've maintained demand rather than focusing on the supply and the concern that I have is the decoupling of the United States from China, the decline in global trade that we're experiencing as the US becomes more isolationist in its tendencies, etc., everything I'm seeing actually suggests that we're likely to see an inward shift on the supply frontier at the same time that we're working to maintain the demand frontier. Is that similar to the way you're thinking? That basically means inflation.
SRINIVAS THIRUVADANTHAI: That is correct to some extent, saying that, that's absolutely right. The issue is here, if you go back to trade wars, look at Smoot Hawley and things like that, yes, they eventually are inflationary, but the interim process of destruction of demand-- because so much of income is linked to those global supply chains that we have put in. Even in the US, if you look at it, there is so much thing that goes cross border. If you start disrupting those things, you're disrupting income a lot.
If you look at even-- the US has not actually such an open economy. That said, the beneficiaries of globalization have been people at the top end. If you look at the US has become a much more [?] economy, both in terms of balance sheets, wealth, as well as income inequality, as well as the consumption that is driven by the top 5% who account for like 30%, 35% of discretionary spending. If you do that, you're going to rattle their incomes and their purchasing power and the seamless transition from there to the purchasing power of the bottom 40%, 50% is not as easy. Usually these disruptive processes lead to a disinflationary, deflationary shock before we eventually come past the customer inflationary thing. I think that's my view. I think we have one more episode of big declines and big deflation. Eventually, before we come to the eventual deglobalization and supply chains coming here.
Along those lines, I'm not worried, because I think in a long term sense, what it will lead to is more automation. If you go back to the '50s and '60s in the US when we didn't have immigration safety wall because the immigration laws were from 1924-1965 were really tight. We still had relatively high tariffs. We were a fairly closed economy. What was happening, the Rust Belt actually started in the '50s and '60s, people don't realize it. It started because we were automating