Niall Ferguson, the historian, Harvard professor, and author of more than a dozen books on the nexus of economics, finance, and geopolitics, argues that America’s abdication of its role as the world’s policeman is one cause of the global economic malaise. U.S. policies, or lack thereof, have allowed terrorism to breed and dictatorial states such as Russia and China to assume a larger role in world affairs.

The author of Civilization: The West and the Rest, Ferguson says China’s attempt to move to a true market economy probably will fail, potentially causing serious disruptions to other markets. He likens Saudi Arabia to Iran in 1979—a state ripe for destabilization. In the U.S., he sees tax reform coming, but worries that America’s love affair with regulation will continue to dampen its growth prospects. India gets a thumbs-up, but Europe’s prospects are bleak.

Ferguson recently announced that he’ll leave Harvard next year to become a senior fellow at Stanford University’s Hoover Institution. He spoke with Barron’s at our offices just after November’s terrorist attacks in Paris, and was every bit as thoughtful and provocative as when we last chatted, three years ago.

Barron’s: The U.S. economy has been growing by only 2% to 3% a year. Why isn’t it firing on all cylinders?

Ferguson: There are at least three theories. The seven-year hangover theory suggests that the U.S. will shake off the effects of the 2008 financial crisis next year. The secular-stagnation theory posits that, for a variety of reasons, the economy is in a depressed state. That is most obviously [expressed] in interest rates.

I’m attracted to a third argument, the geopolitical one, that says growth in modern American history has tended to be high at times of national strength and low at times of national weakness, because our weakness has ramifications for the world as a whole. One has to combine the three theories to understand why growth is lower than expectations. It isn’t low based on a pretty long-term average, but it is sluggish compared with the glory days of the Cold War.

What was so glorious about the Cold War?

There were two phases of growth, one associated with the Eisenhower and Reagan administrations, and one with the depressed period in between. Since 9/11, things have gone from bad to worse. We find ourselves in a deflationary version of the 1970s, marked by stagnation, not stagflation. [Russian President Vladimir] Putin is doing his best to give us reasons to man up. But we’re not really doing so.

The global economy needs a strong hegemonic power to reduce conflict, ensure freedom of the seas, and so forth. In the 19th century, it was Great Britain, and for much of the 20th, the U.S. But in 2013, President Obama said there was no global policeman. There are deleterious consequences if the leading power in the world abdicates its leadership role.

What are some of these ramifications?

Part of the reason the world isn’t as buoyant as it might be is that Europe is doing much worse than the U.S. It doesn’t help Europe to have a massive influx of real and “not so real” refugees. Some 220,000 people arrived in the European Union in October, a direct consequence of the disintegration of order in a whole bunch of countries, Syria principally, but not only.

The U.S. walking away from the Middle East has had a direct impact. We’re only beginning to see the ramifications, in Paris most recently. It isn’t going to stop there. There is growing anxiety in East Asia about the rise of China. Japan remains a large economy, but a depressed one in yet another recession. Economists tend to underestimate geopolitical factors because they aren’t in their models. Global order and stability need to be underwritten. It doesn’t just happen spontaneously.

Are you suggesting that the U.S. ought to be the world’s policeman?

Somebody’s got to do it. It better not be the Chinese or Russians. The market system requires an effective state that enforces the rule of law. That is true internationally, as well. As the world becomes less secure, it becomes a less safe place to do business.

A world in which the U.S. yields regional power to China or Russia is one in which the rule of law is driven back. We underestimate the extent to which the age of globalization depended on an American underwriting, and that is gradually unraveling.

Can the U.S. afford to keep the peace?

The U.S. has a fundamental problem: Gradually, its national security is being squeezed by Social Security, particularly its health-care system. It will be squeezed by the burden of interest payments on Federal debt as interest rates go up. In theory, as the biggest economy in the world, the U.S. should be able to afford to build up its military power. In practice, the congressional budget sequester was a blunt instrument applied to the defense budget, cutting it indiscriminately.

The U.S. should be investing to maintain its lead, particularly in areas where it is vulnerable, such as cybersecurity. No matter how many aircraft carriers we have, it might not be that big of a technological leap for us to be matched in the new theaters of war that are emerging.

But as you note, our finances are hobbled.

Entitlements are the obvious problem. Republicans discovered that if you want to cut entitlements, it is hard to win the presidency. I’m optimistic that the U.S. can make its health-care system far more efficient and less expensive as new technology comes into place. With the application of technology, we will start seeing not only stuff about our own health, but also which doctors and hospitals do which things best.

The employer-pays insurance system is loopy and ripe for revolution, in the way that Uber is revolutionizing transportation. We will see similar types of companies revolutionizing health care. At that point, you may be surprised to find that costs start coming down. I can’t imagine in 10 years’ time that when you visit your doctor, someone will hand you a clipboard with a badly photocopied form that you’ll have to fill out for nth time. That’s ludicrous.

You have written about the toxic combination of litigation and regulation in the U.S. What are the odds of reform?

I don’t see any light at the end of the tunnel. The Federal Register has never been so large. The Dodd-Frank and Affordable Care Acts alone produced a staggering volume of regulation. Now we have the Trans-Pacific Partnership Agreement, with a document even larger than Dodd-Frank. It is really disheartening. That there hasn’t been more rapid U.S. growth is due at least in part to these head winds.

Many U.S. companies won’t bring home the cash they have overseas because it would be subject to a hefty tax. Is there any chance this might change soon?

The income-tax code has to be simplified, and corporate tax has to be reduced to some internationally competitive rate. Otherwise, corporations are going to continue to emigrate to wherever the tax burden is lower. Tax reform must be on the agenda of the next president in year one. Tax reform will happen. The political class gets it; the voters get it. It is much harder to tackle excessively complex regulation because there are too many people who benefit from it.

Let’s turn to Asia. You have said that regarding China as an emerging market is absurd. Why?

It is now the second-largest economy in the world, or the largest based on purchasing-power parity, with an influence on the global economy second only to the U.S. China is sui generis. Is China is going to go further in the direction of a market economy? Will it reduce the importance of state-owned enterprises and remove the state from the financial system? Is it going to open its capital account and allow the Chinese to invest abroad freely? Each answer has ramifications for the rest of us like no other economy.

Give us your answers.

We don’t know whether China will be more of a market economy 10 years from now. It is risky for a one-party state to continue increasing the economic freedom of its citizens. President Xi Jinping, who is more interested in power than anything else, understands this well. Consequently, plans for privatization of state-owned enterprises, liberalization of the financial system, and the opening of the capital account will remain plans, but won’t be implemented.

China has created the biggest middle class in history, but middle-class people want property rights. That implies law courts and officials who aren’t corrupt. The moment you demand these things, you are asking the one-party state to loosen its grip on power. The Chinese are terrified of anything like that.

What impact might Jinping’s foreign policy have on markets around the world?

To ensure the one-party state’s legitimacy, Jinping won’t shy away from a relatively saber-rattling foreign policy, because this plays well [domestically]. There is also an element that isn’t propaganda. China is building up its naval capability, modernizing its pretty antiquated army. It has a financial diplomacy that has proved effective. The Chinese have been using their considerable resources to win friends and influence people around the world, including in Central Asia and Africa. China says, “Let us build your infrastructure.” That increases its leverage over a whole bunch of countries that the U.S. has neglected.

What is the outlook for India?

The Indian economy looks to be growing faster than the Chinese economy. India is good for a couple of reasons, including demographics, which turn out to be a lot more important than most people thought. India didn’t have the one-child policy, unlike China, whose workforce is shrinking.

India has rule of law—slow, maybe, but it is there, and a representative government and free press. Unless you think the success of the West is pure luck, which I don’t, those are advantages. There are many thickets of vested interest, but I’m broadly bullish about India’s prospects. The problems India faces are fixable, like infrastructure and housing. China’s problems are much more difficult.

Will the Middle East roil markets in the years ahead?

I expect next year to be more violent than 2015. Many investors don’t realize that since the outbreak of the Arab Spring in 2011, fatalities due to armed conflicts are up by about a factor of four; terrorism is up by a factor of six.

The events in Paris are a reminder that the jihadist network doesn’t confine itself to the majority-Muslim world. It is now embedded in minority-Muslim communities all over Europe. There will be more such attacks, and at some point the terrorists will be successful in the U.S. again. [This interview was conducted before radicalized Islamists killed 14 people in San Bernardino, Calif.] The resources that go into producing radicalism aren’t about to disappear. Networks are difficult to decapitate.

The president has failed to understand this because his model is decapitation. You think, let’s take out the boss. Then you are amazed to find the network [still] grows. We won’t see this go away in the next 10 years. The threat of violent instability in the region will go up, and probably will affect Saudi Arabia. Support for the Islamic State is high among the Saudi population.

Why is that?

An Islamic state can credibly argue that the Saudi royal family is corrupt, Westernized, and hypocritical. The family itself is divided. Saudi Arabia is a weak link, the way Iran was in 1979. If you had to ask what headline would move markets tomorrow morning, a revolution in Riyadh, especially a messy one, would be a pretty good answer. You could see a big terrorist attack on Saudi facilities, and markets would move the price of oil up.

The dollar is strong, and commodity prices are weak. What does that mean for countries like Brazil and Russia?

There comes a point when an investor says, “Hey, that’s attractively priced.” Argentina has been one of the great trades of the year. You might ask, “Where is the political problem horrible, and where is it about to get solved?” It is pretty horrible in Brazil, and I don’t see a fix in the short run. Things will be solved in Argentina, more or less. South Africa? No, that looks bad politically. Turkey? [Prime Minister Recep Tayyip] Erdogan is a dodgy customer. Egypt? I don’t like the way that’s going.

The key is attractive prices and political stability. Money is going to start flowing back into emerging markets that don’t have a political problem, such as Indonesia and maybe Malaysia. In Russia, suppose the sanctions get relaxed, as seems likely next year. Russian bonds have been one of the great performers this year. Everybody was too negative about Russia. There are some interesting opportunities in the rest of the world. It is hard to see the dollar- strength story continuing indefinitely.

What is the biggest risk to global markets?

China. It was so crucial as an engine of growth through the financial crisis. If there is a policy error in China, it could cause huge instability. The government could ease restrictions on cross-border capital flows, which would result in a great wall of money coming out of China. Money would be deployed in Western assets, and it might be difficult for China to cope. Imagine the devaluation impact on the renminbi, and the effect on all other emerging markets, if China suddenly devalues by 20% or 30%.

On the other hand, if Jinping turns the clock back, this could lead to a big downside shock.

Will Europe get its act together?

Europe faces three extraordinary challenges. It wants to have a foreign policy to be able to influence the fate of Syria, but it can’t act independently of the U.S. because it has slashed its defense capability. Secondly, Europe can’t stop this huge wave of refugees. The border is enormous, vastly larger than the Mexican border with the U.S., and much of it is a sea border.

The biggest problem is the fifth column within Europe—people who aren’t loyal to their European states even though they are citizens, second- and third-generation. Potentially, there are thousands of jihadists or sympathizers.

Europe’s problems are unsolvable. Anybody who thinks this great wave of immigration solves Europe’s demographic deficit hasn’t been to the suburbs of Paris.

On that cheerful note, thank you.

Bump

We had the right idea in the first half of the 20th century. Non-interventionalism is the best policy, except in extreme circumstances.

A lot of these new militia and terror groups like IS are a result or partially a result of western intervention.

I'm saying that international intervention has had a string of  creating or fuelling extremist groups

The logic of blowback appeals to human intuitions: you’ve been hit, so why don’t you hit back? But there is no way that those human intuitions can be applied to modern day terrorism. I have already shown Palestinians (here), Pakistanis (here) and Iraqis (above) do not respond by blowing people up nor supporting it – so it clearly is an empirically false statement. But even the  logic of it is faulty for three reasons. Firstly, the bulk of these grievances are caused by the terrorist groups themselves.  I can’t be bothered to write it out again, so here’s what I’ve previously written:

According to a study by King’s College London looking at civilian deaths from 2003-2008 concludes that of the 92,000 civilians deaths recorded by Iraq Body Count, 12% were attributable to coalition forces. 74% were carried out by “unknown perpertrators” described as “are those who target civilians (i.e., no identifiable military target is present), while appearing indistinguishable from civilians.”... [In Afghanistan,] civilian deaths caused by pro-government forces decreased by 24% from 2009-2010, making them responsible for 15% of civilian casualties.

And yes, those numbers have barely changed and are still accurate in 2013. So why not attack the Taliban or Al Qaeda? Perhaps this is what the Sons of Iraq did when they turned to the U.S - against Al Qaeda? I don’t think so. As Loonwatch (without realising what this idea entails) helpfully reminds us: the support for attacks against civilians is roughly the same around the world (and if anything, lower in Muslim-majority countries). It seems being a victim of terrorism, or a nation which is the victim of terrorism has little to do with supporting or carrying out violence. In fact, there are many examples (that I haven’t already mentioned) of individuals feeling aggrieved and not becoming violent: families of homicide victims and support for the death penalty (see research here and here); the Tibetans whose rates of violence match their oppression (see a ridiculous attempt to make the opposing argument here); the black communities after the reconstruction period etc. etc. Even if we step back – away from terrorism – being anti-American is not related with foreign policy. In the seminal The Political Economy of Hatred, Glaeser (at p.46) rehteorically asks ‘why would 34% of French but only 27% of Vietnamese have an unfavorable opinion of the United States?’

Secondly, even if we just focused on the minority of Western-linked grievances, terrorism involves attacking innocent third parties. Even if you want to grant (which I don’t), that individuals become violent when they become aggrieved – why would you attack someone innocent? This is why the human intuition point should strongly be countered: you do not attack an innocent civilian (be it man, woman or child) because someone who you consider guilty attacked you. To be fair, there is a common response:  there is no other way for them to respond. This is commonly given in the context of Israel – they have nothing but rockets and suicide jackets and so they cannot target the military. Leaving aside for the moment that there may be ways of attacking military targets, this is still faulty. It is faulty for terrorist groups because they make it their modus operandi to target civilians. They have time to think about their best method and they choose terrorism. Why does this mean the argument is faulty? Because the empirical record is emphatic that terrorism does not work:

This graph is taken from a lecture by Peter Neumann (at 5:32) and is representative of the academic literature (Abrams (2006), Harmon (2011) and Neumann (2008)). It might be said that this is an academic, not emotional/real response – but that has already been shown to be a ridiculous argument by the empirical record: the overwhelming majority of people can feel aggrieved, and their emotional response is not one of terrorism. I noted how this is precisely what happened after Operation Cast Lead in 2008-9 – and, surprise surprise, humans continue to have morals after Operation Pillar of Defense in 2013.

Thirdly, the logic is flawed because it will leave us paralyzed from doing good. The Woolwich terrorist said that ‘I am fed up with people killing Muslims in Afghanistan’ (see the first element above). I have already spelt out the benefits of liberation of Afghanistan but I want to add two things. Why are these Islamist terrorist more aggrieved than the local population? As Bergen notes, ‘favorable views of the Taliban in polling across Afghanistan over the past several years are consistently no more than 10 percent.’ Second, the government we are working with to fight against these unpopular terrorists is a democratically elected government which has the support of its people (75% of whom give the central government a positive assessment). We needed to carry out the liberation of Afghanistan – not just for the eradication of Al Qaeda’s training ground but the liberation of the Afghan people. If (and as should be obvious by now, this is only an if), there is a response from those who seek to maintain these Talibanised states, then we should accept it and continue to fight against it.   

I was referring more to the likes of parts of Al Qeade and IS

Quote from: M8A-ORD on January 02, 2016, 07:25:17 PM

Quote from: Raptor the Kid (24) on January 02, 2016, 07:12:26 PM

I was referring more to the likes of parts of Al Qeade and IS

So your argument here is that IS has captured equipment given to the Iraqi military. . . The same military with the same equipment that recently dealt a massive blow to IS by capturing a key city and wearing down their control over certain territories?

And that the MAK, which wasn't involved in fighting the Soviets, was responsible for channeling aid. . . And that the MAK eventually evolved in to al-Qaeda, while conveniently ignoring the fact that they were supported by both the Saudis and bin Laden personally regardless of US aid?

And the problem with former mujahideen joining the Taliban has been corrected by the convenient fact that Afghanistan is no longer under Taliban rule and is doing terrifically compared to how it was doing before the invasion.

My argument is that intervention still aided those groups that why, no matter if they also received other support or less of a threat. A different type of intervention is needed to avoid issues like that.

Quote from: Ajax on January 04, 2016, 08:49:35 AM

How is Russia a dictatorship in anyway?

I know this doesn't have any relevance to the article, but I'm kinda curious as to why the author wrote that.

Autocratic government (same thing really). Putin is the leader, elections are rigged, no freedom of speech/religion, been in power in some form since the turn of the millennium, etc.

Quote from: Ajax on January 04, 2016, 11:49:58 PM

2:Putin being the leader means nothing

http://www.nytimes.com/2015/02/28/world/europe/boris-nemtsov-russian-opposition-leader-is-shot-dead.html

http://news.sky.com/story/1437519/the-putin-critics-who-have-been-assassinated

Quote

3:There is as much proof of Russian Elections being rigged as there is for most other first world countries

Huh?

Russians also don't have Freedom of the press (hence Putin somehow having like 87% approval rating. It's not true). I dunno why I said religion though. I knew they didn't get oppressed in that.

http://russiapedia.rt.com/basic-facts-about-russia/political-system/


1:The Russian Constitution provides freedom of religion
2:Putin being the leader means nothing
3:There is as much proof of Russian Elections being rigged as there is for most other first world countries
4:The freedom of speech thing is a large issue, I'll give you that