Centennial Speaker Series Session 4: Balancing the Role of Government and Markets

Minouche Shafik discusses right-sizing the role of government in modern economies and societies. 

This meeting is the fourth session in CFR’s speaker series, The 21st Century World: Big Challenges & Big Ideas, which features some of today’s leading thinkers and tackles issues ​that will define this century. The series commemorates CFR’s centennial. Our first session on April 13 featured Margaret MacMillan on “What Are the Lessons of History for Our Era?,” the second session on May 4 featured Anne Applebaum on “Can Democracy Survive?,” and the third with Nicholas Stern on “Will Climate Change Us Before We Change It?” took place on June 16.

This event series was also presented as a special podcast series, “Nine Questions for the World,” in celebration of CFR’s centennial. See the corresponding episode here.

HAASS: Well, thank you and welcome one and all to this, the fourth meeting in our centennial series, obviously timed to coincide with the one hundredth anniversary of the Council on Foreign Relations. And the whole idea of this series is to tackle the big ideas and to engage some of the big thinkers and big doers out there to help us tackle them. My name is Richard Haass. I’m president of the Council on Foreign Relations.

And today I’ll be in conversation with Minouche Shafik, the director of the—one of the great academic institutions in the world, the London School of Economics. Dr. Shafik, who since we both went to the same college at Oxford I will call Minouche as soon as we get underway, has held senior positions in just about every major international economic or financial institution—from the World Bank, to the IMF, to the Bank of England. She’s also written on a subject we’re going to discuss today. The title of the book is What We Owe Each Other: A New Social Contract for a Better Society. The way this is going to work, if I can find my notes here, is she and I will have a conversation for just over half an hour, plus or minus, about some of the big issues of the day. And then we will open it up to our members.

So, Minouche, first of all, thank you for taking the time to do this. I have some idea what it’s like to run an academic institution normally. In the age of COVID and pandemics, it’s abnormally. So thank you. It’s great to have you. And I can’t think of a better person to take us through some of the big questions of the day.

SHAFIK: Oh, it’s a pleasure to be here, Richard. Wonderful to be here with your members of the Council.

HAASS: Thank you. So I want to start out looking at some of the big issues about the relationship between the government and economies and societies. So my first question is, you know, when I look around, and I look at what’s working its way through the U.S. Congress—if anything can be said, these days, to work its way through the U.S. Congress—but this new Competition Act, basically gets the government involved in a degree of, if you’ll pardon the expression, industrial planning.

And then we look at all sorts of things about American competition policy. We also look at certain reactions about supply chain uncertainties, in part because of resilience issues dealing with the pandemic, also, again, competitiveness issues or security issues dealing with China. Are we at something of a turning point? If we were to put on a historian’s hat, if you will, and imagine looking back on today in ten or twenty years, is it your sense that we’re at something of a turning point narrowly in the relationship between governments and economies in the Western, largely capitalist world?

SHAFIK: I think we are at a turning point. And I think that turning point has arrived for a number of reasons. Partly, it’s the sort of—the long legacy of the 2008 financial crisis, compounded by the pandemic. And I think the underlying reason why the turning point is here is because I think our social contract is broken. And it’s broken because people feel that the current setup of the relationship between markets and governments isn’t delivering enough security and it’s not delivering enough opportunity, and a fair sense of opportunity.

And the examples you just gave, around, say, competition policy, is an example where there’s a sense that markets are no longer fair, and that needs to be addressed. And of course, the pandemic, I think, has really highlighted the fact that many people feel incredibly insecure over health care, over precarious work. And those challenges have been highlighted by recent events. And, yes, I think we are at a turning point.

HAASS: I want to get to the question that you highlighted in a minute, which is inequality and security, the safety net, and basically helping people deal with all the challenges of the twenty-first century, and whether there’s enough cushion, and what has to be done. But let’s sort of take a step back, though, and first just focus on the economic. Isn’t there a danger though—I mean, the word “industrial planning” is freighted, it’s loaded. One often thinks of Japan trying to pick winners and losers. The Obama administration had some unfortunate experience in the green energy space. The idea that—why do we want the government to play a larger role? Why is it happening?

Because one could argue if one looked at, say, what happened with Moderna and Pfizer, the great breakthrough on the vaccines intellectually—put aside production questions—was private sector. The great—if one looks at technology in the IT space—if one looks at the Googles and Facebooks and Apples and Amazons—the government didn’t do those. The private sector did that. Silicon Valley did it. This nexus between universities and businesses, these enormous venture capital pools in the United States. It just seems to me, on the surface of it, a slightly odd time to be saying the government has to play a larger role in the economy, when things seem to be working pretty well in the area of innovation and productivity.

SHAFIK: So I would—I would take a slightly different view. I mean, I am not a fan of industrial policy. You know, when governments try to pick winners, it usually ends up being losers picking the government for subsidies. And that often—usually doesn’t work. In fact, I spent a whole—I used to teach a whole course at the Wharton Business School on competitiveness and industrial policy. So I think that sort of more traditional industrial policy, of picking sectors or industries where you think your country has a comparative advantage, rarely works. There are many, many more—

HAASS: Could I—could I steal that phrase from you? Whenever the government tries to pick winners it turns out that the losers pick government?

SHAFIK: You can.

HAASS: That’s a fantastic—that’s a fantastic capsule of the criticism. So that’s no longer yours. (Laughs.)

SHAFIK: Fine. I don’t have copyright on that phrase, so you can share it, Richard. But what I would say is, if you look—let’s look at the Pfizer, Moderna pharmaceutical successes. That was built on a foundation of decades of government funding, of research, of core R&D. And it was topped up in the context of the pandemic by lots of additional government funding of those companies, to accelerate development of those drugs. And so I think that sort of upstream R&D funding of things that industry won’t do is highly desirable.

And similarly, competition policy is highly desirable. There’s a lot of evidence in the U.S., for example, that competitiveness has fallen massively. That actually many, many sectors—pharmaceuticals, banking, transport—a whole bunch have become much less—much more concentrated and less competitive. And of course, platform economics around, you know, Facebook, Google, et cetera is another really good example of concentration. And where does the productivity come from? It comes from innovative ideas and competition. And that’s where I think government has an important role to play.

HAASS: Agree 100 percent on the idea that government needs to fund, in many ways, basic research. Companies tend to focus more on the applied. And something that we’ve allowed to shrink in this country is our percentage of our GDP. And how it’s good to see more people understanding.

But I wanted to follow up on something you just said. Does that mean we’re basically in the early days of what you might—of a period that’s likely to see greater regulation and greater antitrust as a dimension of competitiveness policy?

SHAFIK: I think, yes, because I think the emergence of platform economics as we call it—you know, the gig economy—has raised real challenges for conventional competition policy. And I think we’re at a moment of change. You know, we used to think about competition as having to be driven by consumer detriment. Consumers had to be worse off as a result of the way a particular market was organized. And you could argue that some of these recent innovations have actually made consumers better off.

But the question is also what is the long-term consequence of high levels of concentration in these markets? Will those companies at some point extract rents from the fact that they have these incredibly privileged positions? And are consumers worse off because new potential entrants are not even entering, because as soon as they start to grow they get bought up and swallowed up by these other companies? And so I do think we’re at a moment where competition policy is being rethought, and additional regulation—including around things like green and carbon issues—will be on the rise.

HAASS: Given that there’s very few large corporations that are any longer domestic only, does this suggest that this whole area of competition policy, regulation, and antitrust, and the like is necessarily going to have to be an international, cross-border undertaking?

SHAFIK: Well, that’s a difficult question, because it’s a—you know, the only place that has tried to do competition policy on a cross-border basis is the European Union. And they regulate competition on a pan-European level. And it’s probably the most powerful part of the European Commission in terms of its powers to enforce its decisions. And it’s very controversial. So it’s hard for me to imagine any global authority having the kind of—that kind of power across many countries. And so I think for now competition policy will remain primarily a national issue.

But I think there are other issues, like corporate taxation for example, has emerged as a big global issue. And recent decisions that were taken at the G-7 and the G-20 are a really good example of a move toward a higher-level of international cooperation on a global economic issue.

HAASS: Yeah, we’re seeing that. And we’re also seeing growing interest in cross-border taxes to deal with climate related concerns. So my hunch is those of your students who are specializing in cross-border taxation, they have promising futures.

SHAFIK: I agree with you. I agree with you. And it’s complicated. The issues around cross-border issues and carbon taxation could potentially be a great source of future revenues for international lawyers and accountants. (Laughs.)

HAASS: Yeah, no, it’s building in this country, where there’s a desire and principle to introduce it. The question is, how in practice is it actually applied, shall we say? We haven’t quite gotten to that point.

SHAFIK: I mean, the simple answer is—

HAASS: So let’s turn—

SHAFIK: Sorry.

HAASS: Oh, no, go ahead.

SHAFIK: I was going to say, the simple answer is we’d have a minimum carbon tax globally. But that will be so difficult to implement and achieve. And so what you’re going to end up instead is countries having border taxes, which will be very complicated to implement. I mean, I think the impact is greatest for a few sectors—things like steel and cement. And so it may be simplest to just concentrate on those very high-carbon sectors initially.

HAASS: The other way to do it would be in-between, would be, say, though regional trade agreements. One could imagine that something like the CPTPP, they could introduce something of a collective levy based upon the fuel used to produce a certain item, or lifecycle fuel estimates. That’d be a—that would be an in-between option. We’re not there yet, but I don’t think that’s inconceivable at some point.

SHAFIK: Yeah, agree.

HAASS: Let’s talk about the other half of this, which is the—which in many ways is the subject of your book, which is the larger government role in society, and this whole question of the social contract. So what do you see, one, as emerging? And to what extent do you see that as still inadequate? And what would you like to see emerging? So this could either be—I guess I’m beginning with what do you see emerging descriptively? And then you could either be predictive or you could be judgmental about what you would like—either expect to see or like to see in this area of what does a twenty-first century social contract either look like or need to look like?

SHAFIK: Yeah. So I think our twentieth century social contact was broken by two things—technology and the changing role of women. Technology fundamentally changed work and made the possibility of much more flexible working more common. And it also changed what we need from our educational systems. The changing role of women has changed our ability to rely on women to take care of the young and the old for free. And our whole social contract was premised on the fact that that’s what women would do. But now that women are increasingly educated and employed, we see in many countries huge challenges around childcare and around old age care. And all of this is compounded by aging and climate change. And so I think those are the big forces that have meant our old social contract was broken.

What do we need instead? Well, in my book, which is called What We Owe Each Other, I sort of go through the different stages of life and show how a different social contract could deliver more. I’ll just give two examples. In the area of education, our current educational system is premised on people getting educated from about age six to their early twenties, and then that’s supposed to be sufficient for your lifetime.

But what we know is that the years zero to three are the most important for achieving social mobility and equity. That’s when the brain development happens. If you don’t get kids good nutrition and good mental stimulation at that age, no matter how good a school you send them to they’ll never catch up. And so a better social contract would invest more way upstream for social—for equity reasons—and much more downstream, because the idea that a career is going to last thirty years is no longer valid. Careers in the future are going to be forty, fifty years. And so people will need to retool often. And so the whole shape of our educational system needs to change.

Same with work. I believe in markets. I think flexible work—you know, the increased flexibility in our labor markets has been a big contributor to productivity. But the pendulum has just spread too far in the direction of insecurity. And so going forward, I think we need to move to a social contract where flexible workers get benefits in proportion to how much they work. And so if you work for three or four employers during the week, each of those employers should be contributing to your Social Security, your pension, and your sick pay. And I think the costs of not doing that have become so apparent, you know, in this time of the pandemic.

You know, when I grew up working in international development, we used to talk about something called the informal sector. Well, the gig economy is just a fancy word for the informal sector. And it comes with all perils of informal working. And I think that’s another area where the social contract needs to change.

HAASS: It seems to me, listening to you—and I agree with almost everything you said—the pandemic will be an accelerant, because suddenly this idea of a nine-to-five, or whatever the equivalent is in the U.K., five days a week—that working model is out. And this is—this whole debate, we did a whole taskforce on it at the Council on Foreign Relations a few years ago, about the future of work, about productivity increases, the inexorable modernization of these technologies. Again, it’s going to be accelerated, because a lot of people are going to be looking for ways not to be quite so worker dependent if and when there’s a future pandemic.

So it seems to me, one of the consequences of it—and you mentioned it—is increasingly separating the social safety net from a particular job. If you’re right, the average person’s going to have, I don’t know, fifteen, twenty, twenty-five jobs as part of a career, and might actually have three to four at once, neither being full time. The idea that your pension or your health care would be job-related seems increasingly archaic.

SHAFIK: Completely agree. And delinking it from employment is key. You know, one of the other things I worry about is that we currently tax labor a lot. The additional top-up you have to hire someone in terms of benefits is—really adds a lot to the cost of labor. And we probably tax capital too little. In the U.S., just to give you a ballpark, capital is effectively taxed at the rate of 5 percent, labor is taxed at the rate of about 25 percent when you add everything in, which biases the willingness of people to create jobs. And I think taking some of those labor taxes off of employers, having them funded through general taxation, and delinking health benefits, pension benefits, et cetera from an individual job, is really essential to deal with the labor markets of the future. I think it will also, in the end, help create more jobs.

HAASS: We may have an interesting test case in this if the tax rate in this country on capital gains heads north.

SHAFIK: Exactly.

HAASS: We may see some of that. One of the candidates in both the presidential election and in the New York mayor election, Andrew Yang, he was a great advocate of so-called universal basic income.

SHAFIK: Yes.

HAASS: What is your sense of that? Because you talked about benefits being linked—not being linked to jobs, and that each employer would, say, pay a chunk of certain things. Well, what if someone doesn’t work? What is your sense of the social contract and UBI, and whether we are likely to have a floor that is unrelated to one’s willingness or ability to work? And if so, whether that is a necessary, but also in some ways corrosive, idea—by not linking individuals to work?

SHAFIK: Yeah. So in the book I talk about universal basic income. And I am not a fan. And I’ll explain why. I have personally, actually, worked on cash transfer schemes in low-income countries, where you deliver cash—very small amounts of cash—to the poorest households, to put a floor on consumption. And those work very well. But in any advanced economy that has the capacity to target, the idea that you would raise taxes by, let’s just say, 20 percent of GDP to cycle all this money through the government to then distribute it to people who don’t necessarily need it is incredibly inefficient.

I think the more profound reason why I don’t like universal basic income is because I think work is part of the social contract in every society. In every society the deal is that you—when you’re young, you’re looked after. When you’re an adult, you contribute. And when you’re old, you’re looked after. And work is the way that we contribute in the social contract. And so I would much prefer if someone is not very productive and can’t earn enough to live a decent—at a decent level, that you would top up their wages with, say, earned income tax credits. But you still ask people to work and contribute. I think universal basic income is, like, giving up on people and saying: You have nothing to contribute to society.

HAASS: I think this—I agree 100 percent. And I think there’s also questions about dignity, about the sense of the individual, and where that—identity and dignity and where they come from in the absence of labor. I think is part of it.

What about inequality in all this? To what extent do you see the new social contract that either is evolving or needs to evolve smoothing out inequality? In the United States, we’re coming out of the pandemic. Not as much as we perhaps could or should given resistance to vaccination, but we are where we are. But inequality, it seems, has been exacerbated. We had significant inequality going in eighteen months ago, and we have even greater inequality coming out, in part from what you were just hinting at, that those whose incomes or wealth is capital-based have fared better than those whose income is labor-based, because of the—so if—whatever the Gini coefficient for the United States was, it’s moved as a result of COVID. To what extent is smoothing out or reducing inequalities a desirable or necessary part, do you believe—or inevitable part, for that matter—of a twenty-first century social contract?

SHAFIK: Yeah. So I think every society in the world can guarantee everyone a minimum amount to have a decent life. And that minimum includes a minimum level of income, based on work—preferably based on work, a minimum amount of health care and access to education, and also a minimum pension to avoid destitution in old age. But beyond that, I think the real solution to inequality is not so much redistribution of income but what we—what economists call pre-distribution. Investing in people, in their education, and investing in parts of the country that are deprived and poor to increase opportunity for those people. If you have to redistribute a lot at the end, your pre-distribution has failed.

And so in the book I talk a lot about what—how pre-distribution could operate. I’ll just give you a small example from the U.S., from some fantastic research which is called Lost Einsteins. And what they did is they looked a U.S. data of kids in fourth grade who had exactly the same math and science skills in fourth grade. And they looked at how many of them as adults had patents and were innovators. And what they found is that you happened to be born in a rich family, you were ten times more likely to have a patent. If you happened to be born in Silicon Valley, you were ten times more likely to have a technology patent than a child born elsewhere—even if you had the exact same math and science skills in fourth grade.

And the gap—those lost Einsteins, those kids who happened to be born into a poor family or in a poor place, if you could get them to innovate at the level of those other children, you would quadruple the rate of innovation in the U.S. economy, with huge benefits for productivity. And so those are the kind of pre-distribution policies that I think are the ultimate answer in inequality. And so what I basically argue is, let’s move into a society where we have high rates of investment in pre-distribution. And that is how we’re going to make ourselves both more equal and rich.

HAASS: I like that, pre-distribution as opposed to redistribution. That’s the second thing I’m going to steal from you. I just—I figure if I’m open about it, I’m not sure it still constitutes theft. But I just want to announce it for all to hear here.

So part of what I take from this, I listen to you about a larger government role in the economy, a larger government role in ensuring a certain foundation—both of opportunity, but also outcomes—for citizens, particularly early life and late life. That is, in some ways, the United States, how do I put this, moving in a slightly different—more in a quote/unquote “European” direction, if you will forgive me. Is that fair, that in some ways we’re becoming a little bit more like you all, one? And then, two, are there ways in which Europe is or is not being slightly more like us? Because there have got to be things here that Europeans have said, look at this American performance, economically and other ways. They are doing things that we are not. What’s your sense of that? Is there a bit of American-European convergence, or not?

SHAFIK: Yeah. It’s a good—it’s a good observation. I mean, I do think there are many areas where the U.S. has under-invested in itself—underinvested in education, under invested in infrastructure. And in that sense—and also underinvested in its safety net, let’s face it. Health care is the obvious area, but there are—early years education would be another one I would list. And so we are, I think, appropriately entering a period where the U.S. will invest more in social goods in those areas.

You’re right that Europe—I don’t think—I think there still remains a very strong consensus in Europe about the so-called European social model, and not much appetite to unpick that. But at the same time, I think Europe is deeply concerned about its competitiveness and its place in the world, and its geostrategic place in the world is also clearly dependent on the competitiveness of its economy. I think in European circles the—you know, Europe’s nightmare scenario is that it becomes a sort of museum for the world, which is inhabited by old people. And people come and visit these kind of beautiful relics, but it is not a dynamic economy. And so I think that is a preoccupation in Europe, with a big emphasis on investment in R&D, why don’t we have any tech—you know, global tech companies, why aren’t we at the forefront of innovation? So, yes, that is a preoccupation. And there is a lot of looking both—to be honest—looking both west and east to try and learn from elsewhere.

HAASS: Well, I was going to raise the question of the east, so you beat me to it. So let’s raise that. Twenty years ago, when—roughly—when China was brought into the international financial institutions, particularly the Bank, there was hope, to put it bluntly, that they would become more like us. That this would be something of a socializing experience, become more market oriented. They’d phase out, at least in large part, the state-owned enterprises. That they would also become more politically open. And needless to say, that—in the last ten years, any of that has been walked back and then some. And China now looks more statist economically and closed politically.

So what do you derive from that? Is that sort of simply your sense this is Xi Jinping’s hallmark, but when he goes these kinds of changes inevitably have to resume? That he will be a kind of a(n) interlude in Chinese history, that in order to succeed China or any society has to become more mixed? Or do you think there really is a more top-heavy alternative to what we’ve been discussing here?

SHAFIK: Yeah. I mean, they are definitely experimenting with a different model, which tries to marry a market economy with more authoritarian politics. What I think is really interesting at the moment is that you—you know, even though China wasn’t a democracy, there was a selectorate, if there wasn’t—there wasn’t an electorate, but there a selectorate in the party. There was some internal competition and kind of merit-based appointments. And so the political system, while not democratic, at least had some competitive and performance-based elements to it. And I think that’s—you know, if that disappears, you have to wonder how—if it will be as successful as it has been in the past, because I think that model has served them pretty well in recent decades.

But, you know, from an international perspective, there are just too many—too many interdependencies to not engage. And so I think the challenge will be to identify those intersections of common interest. Climate is the obvious one. The pandemic is the other. And—

HAASS: I’m just going to interrupt for a second, if I could. Climate and the—and the pandemic are the two areas of common interest. One would have to flunk the international community on both.

SHAFIK: Correct.

HAASS: I mean, climate, the Earth is heating more than we’re acting to counter it. And the gap between those who are or soon will be vaccinated and those who need to be vaccinated is enormous. And I don’t see any serious plan for quickly closing that gap. So if one were going—I mean, you’re in the business of giving grades. You run an academic institution.

SHAFIK: Yeah.

HAASS: But I would think for both climate and the pandemic, one would have to give the world a failing grade on both.

SHAFIK: Yeah. I have to say I would agree with you. I mean, the pandemic is a really troubling example, because if you were writing a textbook case of a situation where you would need global cooperation, the pandemic’s pretty much it. Like, you couldn’t ask for a more clear example. And the IMF has put a plan on the table to vaccinate all the vulnerable groups of the world, 40 percent—essentially 40 percent of the population, the most vulnerable, all over the world. It costs about fifty billion (dollars). Now, the U.K. alone has spent 300 billion (dollars) domestically to deal with the pandemic. The U.S. has spent well over a trillion (dollars). Fifty billion (dollars) is a rounding error in those numbers. And these are individual countries, right? While has the world not been able to put fifty billion (dollars) on the table to deal with vaccinating the most vulnerable, when we know perfectly well that new variants will come and get us? (Laughs.) You know, I am hugely frustrated and disappointed. And agree, we failed. It’s a lack of leadership, frankly, at the moment, that hasn’t been able to solve that. And it doesn’t augur well for our ability to deal with climate change. So I agree with you.

HAASS: So let me—let me connect what we’ve just talked about to the previous conversation. So we’ve been talking about a social contract in two ways, between the government and the economy and the government and the society. And so whether there also then needs to be something of a social contract internationally between individual countries and other countries to deal with these common challenges—like climate, like pandemics. It seems to me that there’s a gap. That we’ve got a world that is largely organized around sovereign entities. And no one’s making an argument against sovereignty, but what we are saying is that in order for individual entities to prosper or thrive, they have got to pool their efforts. And what we’re seeing is a failure to do just that.

The irony that we’ve had this pandemic—which began in Wuhan, however it began—that has killed, I would estimate now, what, ten, twelve, fifteen million people worldwide, whatever the official number is they’re seriously undercounting. Yet, almost the entire response, for better or and for worse, has been national. We see some countries having done extraordinary well. We see some countries having done extraordinarily poorly. But this disconnect between a global challenge and what are essentially national responses for the most part seems to me a real indictment of the absence of a social contract between individual nation-states and the world they happen to inhabit.

SHAFIK: Yeah. You know, one of the things I think is that part of the problem is that when national social contracts fail, you cannot persuade people to cooperate internationally. So, you know, I think, you know, the U.S. is a really good example. Many Americans feel that internationalism has cost the U.S. too much. It’s too much of a burden. We should focus on home—on our needs. I would argue that actually few countries have benefitted more from globalization than the U.S. But the problem is that the U.S. social—the American social contract has failed to share those benefits domestically well enough.

And so I actually think a good national social contract is a precondition to internationalism, which is partly why I wrote this book. Because, you know, I spent twenty-five years of my life in the international economic system and was incredibly frustrated at the movement away from multilateral cooperation. And I think it’s the failure at the national level for social contracts to work well. I think if we think about how should the national social contract—how should an international social contract work, I tend to think of it as concentric circles. You know, we owe the most to our immediate family, and then our community, and then our nation-state. But we also owe something to people in the rest of the world, especially when problems like climate change and pandemics mean that it’s actually in our interest to collaborate with them.

HAASS: The only area I’d take issue with you is I would think that part of the problem here, a big part of it—and indeed, it’s the reason that this institution, the Council on Foreign Relations has launched an enormous educational enterprise—is not simply—or, not so much the failure to share the benefits of internationalism, as to explain them. And if you look at the last seventy-seventy-five years, the United States has benefitted broadly from an absence of great-power conflict. The average—the wealth of individuals in this country has gone up astronomically. The lifespan of individuals and health have gone up tremendously—at least until the last couple of years. Democracy around the world, again, until the last decade or so, has grown.

So I would actually say we’ve gotten an enormous return on investment. That it’s been not a form of philanthropy—though at times it has been—but really a form of enlightened self-interest. But people don’t connect the dots. And I think we have failed to explain why our international efforts are not simply things we do for other folks, but actually are things we do for ourselves as well.

SHAFIK: I agree that connecting the dots is part of the—is part of the issue. But I also think that U.S. policy failures have been also part of the problem. You know, the more open your economy is, the more you have to cushion the shocks for people. So, you know, I think of something like the Trade Adjustment Act in the U.S., which was intended to cushion the impact on American workers of initially the free trade agreement with Mexico and Canada.

And on paper it looks really good. It provides worker reskilling, you know, severance payments, mobility assistance, all the rest of it. It was never funded properly. And so—and so it’s a classic example of where, you know, the U.S. clearly—the U.S. economy benefited from that free trade agreement. The pie grew. But we didn’t look after people who were adversely affected. And that’s what I mean by the social contract failing to create support for internationalism.

HAASS: I hear you. But last question, then I want to open it up. But last question for you from me, at least. For so long you and I worked in the world of the so-called Washington consensus. And I’m not quite sure where we are now, but can you—are we somewhere between that, which was a rather—had a bias towards much reduced government roles in economies and societies—do you sense that we are pretty close to, I don’t know if you’d call it the post-Washington consensus, or however you name it, that that will be, if you will, the new package or standard of what societies either—will be judged by? What is your sense?

SHAFIK: Yeah. So I think that the Washington consensus had an important flaw. The philosophy was, you know, you liberalize trade, you have competition, you privatize, you globalize supply chains, you get big efficiency gains. And of course, some people would lose out, but you compensate the losers. And the problem with the Washington consensus was the losers were never compensated. And more importantly, who wants to be a loser? And I think those two problems—the fact that people who lost out weren’t looked after, but also people who lost out weren’t given new opportunities and reskilled and retrained and experience the benefits of pre-distribution. And so I think a new consensus has to address that issue, has to address making sure the benefits are shared properly, but also making sure that opportunities are enhanced for everyone so that the benefits include everyone.

HAASS: No, I think that’s a sensational point. I would actually argue in this country too much of the debate has been on the tail end, about the distributional aspects, and not enough has been about how we equalize opportunity.

SHAFIK: Exactly.

HAASS: Because this is a country that was based upon not equal outcomes but equal opportunities. And to the extent we failed to make opportunities genuinely equal, we’ll obviously have increasingly unequal outcomes, and the pressure will grow to deal with that. And I wish more of our conversation were about what we need to do, how would I put it, to make the American dream a reality. And I don’t hear quite enough about that in our politics. It’s much more, again, at the caboose, if you will, rather than the engine.

SHAFIK: Exactly. Exactly.

HAASS: OK. We’re in violent agreement there. Which is not surprising given that we both got our degrees from the same college at Oxford. So this is actually a very incestuous here. So let’s open it up to members of the Council on Foreign Relations to ask all the good questions that I wasn’t smart enough to ask.

Kayla, over to you.

OPERATOR: (Gives queuing instructions.)

We’ll take the first question from Nili Gilbert.

Q: Good day. Thank you so much for this discussion. My name is Nili Gilbert and I’m the chair of U.S. policy for the United Nations-convened Net Zero Asset Owners alliance, among other roles.

When I hear leaders considering the social contract vis-à-vis government, especially here in the U.S., a topic that often comes up is the divided body politic and the likelihood that any social contract that we have today may be quite short term because of potential changes in administration and, you know, the potential for that turnover to be extended throughout time. And the perceived volatility in that social contract I think may be one reason that citizens are turning more to other sectors—the private sector and civil society—to support some of the topics that have been raised in your conversation so far. I wonder how you see this, and how you think that the social contract is impacted by people’s ability to rely on its stability over time. Thank you.

SHAFIK: Yeah. I mean, Nili, that’s a great point. One of the reasons I use the term “social contract” instead of “welfare state” is because the social contract is broader than that, and it includes civil society, it includes how we organize our families and the social contract with business and our employers. And you are right, absolutely, that people increasingly look to business and civil society to solve problem, because they feel that our—the state is not delivering. And I think—you know, you think about social movements like Black Lives Matter or the youth climate movement or the #MeToo movement have all been incredibly powerful in shaping public opinion and putting pressure also on business to operate differently. And I think that’s very powerful and very important.

But I also think it’s not enough. Because my worry is that it works for organizations that have political visibility and who have brand names to protect, and it’s not comprehensive. It’s really only through government policy and regulation that you get a coherent and fair burden sharing to solve these problems. And so I think social movements, civil society, business leaders who are willing to be outspoken and stick their necks out and do the right thing should be welcome and supported. But I think ultimately we need—we need rules, regulations, laws, government policy to result in a really truly level playing field and solve these problems.

HAASS: But if government is unable or unwilling to do that—it can’t come together, for whatever reason, to do that, then it seems to me inevitably other aspects of the economy and society will be asked to do more—or, at least have the incentive to step up and try to do more, even if it’s an imperfect substitute.

SHAFIK: Absolutely. And that’s a stepping-stone. I mean, the U.S. has all this innovation going on at the state level, for example, on climate change. And, as you said, if that’s—you know, they’re filling the gaps. Eventually when enough of that happens, hopefully, we’ll get a national solution. And you’re right, it’s a stepping-stone.

 HAASS: A former Supreme Court justice, I think it was Justice Brandeis, I may be wrong, described the states as the laboratories of democracy. And his whole idea is that was where innovation was often introduced, and if it was shown to succeed then it could be brought and introduced at the national level. But actually looked at this, you know, for the states as the place where often the best experiments and innovation ought to be—ought to be attempted.

Kayla, let’s get another question.

OPERATOR: We’ll take the next question from Emerita Torres.

Q: Hi. My name is Emerita Torres. I’m the vice president for policy research and advocacy at the Community Service Society of New York.

This was such a fascinating discussion. And I am so glad that you talked about the gig economy and how you characterized it as the informal economy, because we certainly agree, and I certainly agree. We just released a report at CSS called The Gig is Up, where we actually look at the New York City app-based gig workforce. And one thing that we found was that, you know, this work is kind of characterized as a side hustle for so many, as one of many jobs. But we found that actually six out of ten New Yorkers depend on app-based gig work—you know, Uber, Lyft, and the like—as their main source of income. And it led us to strongly recommend a portable benefits model, which you touched on.

And I’d be—I’d love to hear your thoughts on how these models have worked in other countries and other cities. As we know, for example, in Washington state there’s a bill that’s pending. But other than that there hasn’t been really a big push to implement a portable benefits model. And I know politically now is the time to push for such a model, just given—I mean, at least in the United States federally. So I’d love to hear your thoughts on that. Thank you.

SHAFIK: Oh, well, thank you, Emerita. Yeah, I completely agree. And part of the reason is because people don’t pay benefits to flexible workers, they’re much cheaper. And so they have an incentive to create more jobs that are gig jobs. If they had to pay benefits, you would see a lot of those jobs being translated into permanent work. And the costs of this are huge for the workers involved. I saw a very interesting piece of research in the U.S. and the U.K. which asked gig workers: How much of your wage would you give up to have a more permanent position? And they were willing to give up 50 percent of their wage, which is extraordinary. It tells you how much the anxiety and the insecurity of gig work has.

Now, more and more countries are beginning to impose benefits. So in the U.K., the Supreme Court a couple of months ago ruled that Uber drivers are employees and need to be paid—need to get sick leave, and holiday benefits, and so on. In many continental European countries now there are requirements that flexible workers get benefits in proportion to how much they work. And in the Netherlands, for example, all part-time work—you cannot discriminate on the number of hours a person works. And you can’t differentiate the benefits that they get. So I think there is movement in this direction, but I think we need to continue to put pressure.

You know, I think during the pandemic we saw in so many places people who couldn’t afford to self-isolate because they weren’t entitled to sick leave. And if they didn’t work, they wouldn’t get an income. The madness of that, from a social policy point of view, is really hard to argue with. And so I think—I think it would be hugely beneficial to push in this direction.

HAASS: I’d like to ask you an unfair question, if I may. Since you are a member of the House of Lords. Part of your pre-distribution argument is that we need to make opportunities real for everybody. Do we also have to eliminate the advantages of some? Like, do we really need to rethink inheritance? Do we need to think—I don’t know if the LSC has a policy of legacy admissions. Do we need—does leveling the playing field mean just helping those who have been disadvantaged, or does it also mean in some ways taking away some of the advantages from those who have them?

SHAFIK: Yeah. So we don’t do legacy admissions. It would be illegal in the U.K. to do that, and we don’t do that. And I do think it’s a problem—I do think legacy admissions are a problem. But I think—but on the broader point, you know, we do need to—there are huge, huge unevenness in the opportunities that people face. And one of the ways I think one has to make this argument—it isn’t just about equality. It’s also about productivity.

You know, in the U.S. if you look over a fifty-year period, from about 1960 to about 2010, that was a period in which the civil rights movement meant that women and Black people were increasingly allowed to enter jobs that previously they had been deprived of. And the impact of that is that employers who, you know, in the past could only choose from a pool of white men for their employees, could suddenly choose from a much bigger labor force that included women and Black people. That change resulted—explains about 20 to 40 percent of the productivity in the U.S. economy over that fifty-year period.

So this isn’t just about being equal. This is also hard-nosed economics about what makes a country productive. And if you draw on the talent of your entire population, you will increase productivity. So I would—I guess the way I would put it is not that I want to take privileges away from other people. I want to tap into that talent and create a level playing field so all the talent in society can do its best.

HAASS: I remember when in Japan Abenomics was known, then it was called as womenomics, to basically bring into the workforce a big slice of the population that had been essentially excluded for any number of reasons.

SHAFIK: Absolutely. And labor force participation by women in the U.S. is low, by comparison to Europe, for example. And it’s fallen during the pandemic.

HAASS: Good point.

Kayla.

OPERATOR: We’ll take the next question from Catherine Mann.

Q: Hello. Katherine Mann, here. Good to see you, Richard and Minouche. It’s been quite some time since I’ve seen you, Minouche. But let me tell you, I will be in London at the Bank of England.

SHAFIK: Congratulations. I heard your joining the Monetary Policy Committee.

Q: Yes. I am. I’m looking forward to it.

This has been a very interesting conversation. I’d like to pick up on a couple of points that were coming up in increasing amount—this relationship between volatility and change on the one hand and productivity. I mean, they are two sides of the same coin. You only get productivity growth if you have fundamentally creative destruction, changing what people do, what businesses do. And so the question that comes up in the context of your social contract is how much are we going to make people change, transform what they do, have businesses go bankrupt, not be zombies?

How much of the social contract is a requirement? It’s not just—oh, there’s an opportunity, yes. Preventing opportunities. But how much of it is going to be a requirement that in order to be part of the social contract, to get the benefits, you have to be willing to move, to retrain? Not just you have an opportunity to do it, but we’re going to make you do it? And of course, Denmark’s collective security is an example, and so forth and so on. So there are examples out there. But I don’t think we have really focused significantly enough on what are going to be the rules of the game in order to get the benefits. And what do you think about that?

SHAFIK: Yeah, absolutely, Catherine. Very good point. And a lot of the really good research on this was done at the OECD, where you were, of course. And I think—yes. I think one of—one of the big drivers of productivity is, let’s face it, Schumpeterian creative disruption, firms going bankrupt, those assets moving around, new firms emerging, people losing their jobs and moving to other jobs in which they’re more productive. And all of that disruption is a big driver of productivity in our economies. The key point I’m making in my book about the social contract is you want those benefits. You want the productivity gains. But you have to help people make that transition.

So if you look at the Nordic countries, for example, they have the highest worker turnover in Europe. People lose their jobs all the time. People lose their jobs. But it’s not a social crisis, because their unemployment benefits are about 80 percent of their previous wage. They’re immediately put into training programs. And within a year, the vast majority are in a new job. And so unless you provide all of that support to help people deal with disruption, you’re going to end up with stagnation and insecurity, which is what we’ve got at the moment. And so part of what—exactly what I’m trying to argue is enable change, support flexible markets. But support people through it. And the way to support people is through a better social contract, oriented toward what a modern twenty-first century economy should look like.

HAASS: OK, Kayla, were going to try to squeeze in one last short question. And I will ask the impossible of any academic, which is to be equally succinct in an answer. I know I have trouble doing it.

OPERATOR: We’ll take our last question from Paul Chen.

Q: Thank you so much, you both. I really appreciate it.

My question’s about the notion of pre-distribution of skills. So I’m an entrepreneur, tech entrepreneur, and also advisor at U.C. Berkeley startup accelerator. In working with startups and tech companies, what I notice is that a lot of these tech companies actually don’t have enough profits to pay gig workers higher, because they pay most of their revenue to software engineers, who are routinely making 300K (dollars) or above. How do we address this huge discrepancy between engineering labor costs versus the cost of blue-collar jobs? Thank you.

SHAFIK: Yeah. It’s a great question. I mean, I’ll try and answer it briefly. I think a key thing is that a lot of those blue-collar jobs, as we know, are going to be automated away. And so we need to find skills that—we need to invest in skills to enable those people who are in those jobs to be earning the higher amounts. I think the answer is really on the skills investment side rather than in trying to distort the labor market in terms of what people are paid.

HAASS: It’s interesting, how many conversations come down to education, in particular life-long education, from the earliest moments throughout fifty years of careers, rather than just this frontloaded idea we think of the high school/college age?

SHAFIK: Absolutely. I mean, I—you know, for me, both in terms of my professional life but also my personal life, education is the answer to many, many things. I often remind people, and in the book I show the data, the average return to investments in education globally is about 10 percent. The average return to the S&P 500 over the last fifty years is about 8 percent. So it’s about the best investment you can make. And as someone who runs an academic environment, I think that’s a good place to end. (Laughs.)

HAASS: That’s a very good place, particularly for those who you’re trying to encourage to support your university. (Laughter.)

Minouche Shafik, thank you so much, both for what you do, for all you’ve done—this is—you’ve had a truly public career—and for being with us today. This has been a sensational conversation. It gave a really rare opportunity to take a step back and to try to frame a lot of what is going on in a large historical perspective. So thank you for spending an hour with me and with us.

SHAFIK: Oh, thank you, Richard. It’s been a pleasure. And delightful and wonderful questions. And thank you very much.

HAASS: Stay safe and well, you and all who are with us. Thank you so much.

SHAFIK: Goodbye.

(END)