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Niall Ferguson finds the future in the past

Kevin Chinnery
Kevin ChinneryOpinion editor

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He's running late. It's an occupational hazard for a rock star professor juggling the global lecture circuit, high-brow talk shows and op ed pages, and advising board rooms on what might be lurking around the corner.

Harvard's Niall Ferguson has single-handedly propelled economic history – a subject sadly underdone in Australian universities – into the global limelight.

His 2009 Channel Four series, The Ascent of Money, made sense of the forces behind the global financial crisis for an international television audience. He has written a dozen hefty books on subjects like why the West got rich while other societies fell behind, or what made the period from 1914 to 1945 so peculiarly violent.

Niall Ferguson, British historian, challenges a lot of popular theory. For example on digital disruption he says: "I think all the people who predict mass unemployment through robotics have forgotten all of economic history." Peter Braig

His Australian visit this month was hectic: speaking to a mini-Davos event at Hayman Island, and at the Sydney Opera House on the 40th anniversary of the think tank Centre for Independent Studies.

We have squeezed in afternoon tea, and it's an earnest Scotsman who finally arrives, apologetic, but keen to talk shop.

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I ask Ferguson where future historians will place us right now. It's been a very long aftermath to the GFC. Even the cheapest money in history doesn't seem to be lifting the world off the bottom or restoring us back to normal growth and progress.

He's the optimist. We've passed the point where so-called secular stagnation could take permanent hold in the US. That's still imperceptible to most, but "it always takes ages for people to realise we have turned a corner". He reckons that happened in the first quarter of this year, and he recalls it was 1982 before most realised that the great inflation of the 1970s was over, and began changing the way they thought.

People are still saying scary things though, I say, like bond king Bill Gross's suggestion this month that we will need "helicopter money" – cash created and scattered by central banks – to provide incomes for the millennial generation when they all lose their jobs to robots.

Doesn't that sum up our predicament: caught between reckless monetary stimulus on the one hand, and the inexorable force of technology pressing on the other?

Ferguson warns against established countries overreacting to the rise of emerging nations - such as China. President Barack Obama and Chinese President Xi Jinping on the North Lawn of the White House in 2015. AP

"You can't really say the US needs helicopter money: they are at full employment," he replies. "The labour market indicators are screaming. Why would you throw petrol on the flames?"

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And the much-feared technological unemployment as digitisation destroys swaths of white-collar jobs does not even pass the historian's sniff test: "I think all the people who predict mass unemployment through robotics have forgotten all of economic history."

Human redundancy 'doubtful'

Digital tech is not even as disruptive as petrol engines or jet engines were. "It's simply a claim that there is some magical difference between digital innovations, and all previous innovations, which means that humans will be permanently redundant. We'll see. I doubt it."

Ferguson's worries about the post-GFC world go beyond just the usual concerns of economists with slow growth or debt.

Ferguson says that writing the Kissinger book has taught him that the US has to stop swinging on a pendulum between neo-con intervention, and then back to isolationism. 

In his 2012 book The Great Degeneration, he wrote that the West had succeeded because it created institutions. Now our institutions are failing, and even working against us.

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England's political stability after the 1600s created trust and a financial system based on credit – but that has led now to unpayable intergenerational debts.

Rule of law has, in the US, become rule of lawyers. The state has crowded out civil society, all the things we used to do for ourselves.

All this, he fears, is leading to what fellow Scot Adam Smith called "the stationary state", the 18th-century version of secular stagnation.

Ferguson argues the quality that makes Trump attractive is his attack on the political class. AP

"My story is, our institutions are contriving to lower our growth rate through a whole complex combination of disincentives. Public finance now represents a massive transfer of resources from younger generations to baby boomers. Regulation makes it hard for many sectors to innovate. Rule of lawyers is why the US is not the dynamo it was. And if we can't make our kids numerate to Chinese levels, we risk making them unemployed.

"We have done a lot of work on how creating better institutions have helped emerging economies grow, but not much on the opposite story: on how developed countries' institutions can deteriorate."

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As growth slows and opportunities narrow, is it also killing America's meritocracy, where a self-serving elite have simply slammed the door behind them – especially in prestige higher education?

Legacy of the mid-20th century

"Did we ever have a meritocracy," he asks. "When we talk about inequality and social mobility, remember the mid-20th century was a very odd time. Because of two wars and a Depression we had low inequality and high mobility. If you want equality, it's a good idea to conscript the entire male population, put them on military pay scales, and confiscate by tax the wealth of the pre-war elite.

"Henry Kissinger (of whom Ferguson is currently writing a two-volume biography) went to Harvard on the GI Bill – a fund to send returned soldiers to university – not some local college as he might have done.

"World War II was a fantastic egalitarian policy – a golden age for those who survived it. But we should not see it as anything other than an aberration. In a normal peacetime society it is very hard to sustain equality and social mobility."

And education? "Every human being is hardwired by evolution to privilege his or her children. Everyone does it. We are not really designed by nature for meritocracy; we are designed by evolution to be nepotists," he says.

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"True meritocrats, and I am one, won't lift up the phone to try and rig the system for their kids, and are letting their kids down. Everybody else is picking up the phone. My kids didn't apply to Harvard or Oxford because it would look like they got in because of me [Ferguson's son is at the University of London's famous School of Oriental and African Studies]. They didn't want me to pick up the phone. That was my ancestral upbringing too, and it made me think I had done something right as a father."

Ferguson answers questions without missing a beat. I get the impression I could ask about jute production in Dundee in 1902, and I would get a view on it. Statistics too, probably.

The stock explanation for Donald Trump, I say, is the revenge of a working class who were not well educated, but who still earned good wages in manufacturing before it departed for China. Now these people feel locked out of US prosperity.

"If Trump's secret sauce was just his appeal to the white working class, he wouldn't have got the nomination," says Ferguson.

Trump can give compelling (if completely wrong) answers to why those people feel worse off, he says – but which also appeal to those who are still doing well.

Perception of corruption

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"The thing that is really potent about Trump is the attack on a political class – the Washington-Wall Street axis – that is perceived to be corrupt." Ferguson also thinks that "the political class has failed in a really major way in our time". "To reduce Trump to some socio-economic story is to miss its power," he says. "It's really about a style of politics, one that challenges established elites."

The real reasons many Americans are worse off, of course, is their sliding relative education levels. "But nobody wants to hear that 'it's your fault'," he says.

Indeed. Trump is part of a political crankiness that is making it hard to sell the painful structural economic reforms that Western economies need, Australia included, I say.

"I don't think anyone has worked out how you do painful fiscal reform in ways that allow you to win elections. Losers are very easy to mobilise. The winners are unborn or too young to vote. And populists in the US can easily shift blame on to foreigners who can't vote.

"It was possible to do fiscal restructuring or tightening in the 1980s, when voters were tired of double-digit inflation and you could form a sort of coalition of the willing. That's hard now that there is no inflation, and rates are so low that financing debt of 100 per cent of GDP looks easy. So all the arguments about reform have to be couched in terms of 'Oh, but in 30, 40, 50 years! ...' But votes from posterity will always be too few," he says.

What happens now to "Chimerica": Ferguson's term for the two-headed beast dominating the world economy, where China's savings fund US consumption of its exports. In The Ascent of Money, he was sceptical that could ever last.

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"The economic consequences when we looked at it in 2007 seemed unsustainable, because of the bizarre flow of capital from China to the US and the effect it was having on asset values, especially property. We were right about that, but wrong thinking it would end in divorce.

"In fact the GFC cemented Chimerica. China's 2009-2010 stimulus got the world out of a great depression, but it has made China more like the US: shadow banks, excess leverage, and asset bubbles. The US and China were originally opposites that attracted. Now they are like a couple together so long they have become alike."

China will have to deal with its debts, he says. "But you can do that with a one-party state. I don't think China is about to implode, or any of that stuff that American hedge fund managers are talking about."

In one essay, Ferguson cautioned against seeing history in retrospect as long chains of cause and effect – the "origins of World War I" narratives beloved of high school history teaching. Actual history is more like an unstable pile of sand, in which things can seem all right for a long time until one grain moves and triggers a rapid collapse.

Ghosts of 1914

As Ferguson points out, even the best-informed people in 1914 believed until the last moments of July that war would be avoided. Many fear those ghosts in talking about the US and the rising power of China.

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"Very big things can happen with apparently no great chain of causes. It's important for US and Chinese policymakers to recognise the so-called 'Thucydides trap' – but also to realise that you can fall into it bloody fast," he says, referring to the phenomenon of an established nation overreacting to the rise of an emerging nation.

"That was true of the financial crisis. Hardly anyone saw it coming. I can legitimately claim I did, but I could never tell beforehand what the catalyst would be."

If Chimerica still works economically, he does worry about political strains between China and the US. "If Trump wins, does he go to Moscow or does he go to Beijing?" He thinks "Beijing underestimates the probability of Trump winning and the probability of him following through". Then there is the danger of China overplaying its hand and the US formally turning to containment.

But Ferguson believes the big global conflict is brewing in the Middle East. In his book The War of the World, he writes that it was an unhappy mix of ethnic tension, economic volatility and the end of imperial rule that tipped eastern Europe in particular into such violence in the 20th century.

"And where are they present now? The Middle East."

The Middle East is one place where the US and China could actually work together; that's the "pivot" that is needed now, says Ferguson. US global retrenchment under President Barack Obama, and which Republican candidate Donald Trump would extend, is perhaps one reason why they are not.

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Ferguson does not believe that the US can or will drop its role as global policeman. "Obama talked the talk about it, but in practice, the risks of isolation or imperial retreat are too glaring" for the US itself, he says.

But it still seems astounding, I say, that America's once-indispensable global fixer Henry Kissinger now has to write plaintive op eds on the Middle East saying that "the US has to decide what role it is going to play in the world".

Ferguson says that writing the Kissinger book has taught him that the US has to stop swinging on a pendulum between neo-con intervention, and then back to isolationism.

Pendulum politics

Kissinger instead sees the US as a balancer between all the other powers. Kissinger was often demonised as the ultimate international relations realist: states are not individuals and there is no such thing as morality between them, and a cynical balance of power is the only way to keep the peace.

But Ferguson argues that Kissinger is an idealist too, because both the order and the balancer need legitimacy – and not many states can provide that.

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The US has always swung on the pendulum to some extent. "I was writing about Obama before Obama had ever been heard of," he explains, "because it was predictable that the next president would be a retreat president – and here we are.

"My ideal president would prevent such swings and try to get the international order to function without the US having to do all of the heavy lifting."

Does Hillary Clinton get that? I ask. "Yes. She has avoided too many concessions on foreign policy, apart from TPP." Ferguson is backing Clinton because he thinks that populists undermine the fundamental unity of the West. "Trump says he would like to 'do a big deal with Putin'. But my rule is, if you don't know what to think, find out what Putin likes and then do the opposite."

Ferguson has for the past year been talking about something called "applied history". He says he has never been interested in just studying the past, but how history is the best way to study our present dilemmas.

He's recently been reading the minutes of the US Fed's Open Market Committee just after the Lehman collapse.

"They start talking about the projections the staff economists are making. Then they realise that's all crap. The big moment is when Fed chairman Ben Bernanke says 'this could be the Great Depression'. Treasury secretary Tim Geithner, a Kissinger-trained man, said 'if it is the Great Depression, then we have to fire both barrels'. That's applied history.

"The guys who didn't know history were out of the conversation, they had nothing to give. Because the economists were doing applied maths, they were trying to get rid of variables that didn't fit into the models. They had excluded all the variables that mattered – demographics, the structure of debt, and so on. The model has become more mathematically elegant, but it no longer resembled reality. Oops."

Kevin Chinnery is the opinion editor and an editorial leader writer. He covered trade and industry across the Asia-Pacific region from Singapore and Hong Kong, and is a former editor of BRW magazine. Connect with Kevin on Twitter. Email Kevin at kchinnery@afr.com

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