Politics in the Time of Corona

 Latin American leaders on the right and left have not fared well against Covid. In other ways, too, the U.S. is increasingly resembling its neighbors to the south.


Bolsonaro dropping the ball. Source: Bloomberg

In “Love in the Time of Cholera,” Gabriel Garcia Marquez imagines an enduring love triangle between two passionate people — Florentino and Fermina — and a punctilious doctor, Juvenal Urbino, whom Fermina is persuaded by her father to marry. Trained as a physician in Paris, Dr. Urbino is a national hero for having saved the Colombian port where the story is set (based loosely on Cartagena and nearby Barranquilla) from recurrent cholera epidemics.

“When [Urbino] returned to his country,” writes Marquez, “and smelled the stench of the market while he was still out at sea and saw the rats in the sewers and the children rolling naked in the puddles on the streets, he not only understood how the tragedy had occurred but was certain that it would be repeated at any moment.”

In cities all over the world in the late 19th century, men like Juvenal Urbino were fighting the same battle, struggling to persuade city governments and urban elites to take the essential measures necessary to limit the spread of cholera. In Western Europe, these battles were won after 1892, the year of the last great cholera outbreak there, in Hamburg. In Latin America, the struggle was much more protracted.

“Dr. Urbino wanted to make the place sanitary, he wanted a slaughterhouse built somewhere else and a covered market. But even the most complaisant of his notable friends pitied his illusory passion. That is how they were: they spent their lives proclaiming their proud origins, the historic merits of the city, the value of its relics, its heroism, its beauty, but they were blind to the decay of the years.” Marquez’s leitmotif — “that the symptoms of love were the same as those of cholera” — seems almost to suggest that the Colombians could not quite distinguish between plague and passion.

Latin America has had an exceptionally bad time of it since the first Covid-19 case was confirmed in Sao Paulo on Feb. 26 last year. Rank the world’s countries by deaths per million, and only a few Eastern European countries look worse. But the Latin American excess mortality figures are especially shocking. Overall, U.S. mortality since January last year has been about 18% above normal, according to estimates by the Financial Times. For the U.K., the figure is about the same (17%). But for Brazil it is 34%.

For Western commentators accustomed to heaping opprobrium on the Brazilian president, Jair Bolsonaro, this confirms the view that he is like former U.S President Donald Trump or U.K. Prime Minister Boris Johnson, only worse. But the theory that populist leaders are responsible for high Covid deaths begins to look less compelling when you realize that the excess mortality rates for a number of other South American states are even worse: Peru leads (123%), followed by Ecuador (67%), Bolivia (56%) and Mexico (55%). There is a political story here, but it is not the familiar one in which madcap right-wing populists excel at exposing their own people to the virus.

As Marquez’s famous novel implies, there is nothing new about Latin America’s rough ride through this pandemic. When the Spanish influenza swept the world in 1918-19, the mortality rates in Guatemala (39 per thousand) and Mexico (20.6) were among the highest in the world, according to the estimates published by Niall Johnson and Juergen Mueller in 2002. Only in Africa, Indonesia and the South Pacific islands were the rates higher. By comparison, they estimate the mortality rate for the U.S. at 6.5 per thousand.

Similarly, in the 1957-58 Asian flu pandemic — which was in some ways closer to Covid in its global impact than the much worse 1918-19 episode — Chile, Colombia, El Salvador, Mexico, Panama and Venezuela all had mortality rates significantly above the global average, according to research led by Cecile Viboud.

So how do we explain this? My first foreign trip in 16 months was to Mexico City last week. It is a city I’ve had a crush on since I first visited it 40 years ago, as a callow 17-year-old on a gap-year adventure loosely based on Jack Kerouac’s travels in “On the Road.” And although the city has grown explosively since then, it has not lost its charm.

There is a verdant, overgrown quality to the center of the city. The stormy mountain weather in summer keeps the air surprisingly clear. And the cuisine remains irresistible to me, not least the inspired madness of chicken in chocolate sauce (mole). Is there a better aperitif than mezcal?

Yet you can see as you walk the streets why pandemics hit Latin America so hard. On the one hand, the populations of Central and South America are older on average than those of most developing countries. Whereas the median age in Africa is 19.7 years and in Southern Asia 27.6, according the United Nations, in Latin America and the Caribbean it is 31. People are also much more likely to be obese than in South Asia or Africa. The age-standardized prevalence of obesity among adults in Mexico is 28.9, not far behind the U.S. (36.2). In India the figure is 3.9, in Nigeria 8.9. On the other hand, Latin America has significantly patchier health-care coverage than most developing countries with comparably old and unhealthy populations.

All over the world, it is now clear, Covid kills the poor more than the rich, and darker skinned people more than lighter skinned people. Latin America, with its high levels of inequality — where poverty often correlates with skin pigmentation — has therefore presented the disease with a lot of vulnerable people in many big and crowded cities.

Finally, vaccination in Latin America is pretty much a mess. In the U.S. more than half the population has now been vaccinated; in both the U.K. and Canada it is 59%. The figures in Latin America are far lower: 22% in Argentina and Brazil, 18% in Mexico — not much ahead of India (13%). Even where vaccination has gone well (Chile: 57%), the Chinese vaccines they have relied on have proved to have much lower efficacy than the vaccines produced by Moderna and Pfizer/BioNTech.

But these differences should not be regarded as God-given. To explain them, you need to look at the region’s politics. To say that the problem is populist leaders is too simplistic. True, Brazil has a right-wing populist president and Mexico a left-wing populist.

But in Peru it is Congress that wields the power, so much so that it has brought down three of the country’s last four presidents, including Martin Vizcarra, who was impeached twice in 2020 and finally forced to resign despite an approval rating above 50%. In Ecuador, too, President Lenin Moreno did not conform to the populist stereotype last year, and in last month’s presidential election he was replaced by a center-right candidate, pro-market banker Guillermo Lasso. In Bolivia, the pandemic struck after the populist President Evo Morales had been ousted from power.

In any case, even the populists have very little in common when you compare their pandemic responses. Mexican President Andres Manuel Lopez Obrador, known by the abbreviation AMLO, may be a man of the people, but he has done remarkably little to protect Mexicans from either the virus or its economic effects. Unlike in Brazil, there has been almost no fiscal support for the Mexican economy. As the rest of the world commits itself to a “net zero” future of reduced reliance on fossil fuels, AMLO remains strangely preoccupied with restoring the dominance of the state-owned oil producer, Pemex, over the country’s energy sector.

By contrast, Bolsonaro has been forced by the Brazilian Congress to blow out the deficit while at the same time expressing views on Covid that make Trump look like Anthony Fauci. Last week saw large-scale protests against Bolsonaro in numerous cities. His chances of re-election have been further hurt by the return to political life of the former president, Luiz Inacio Lula da Silva, whose criminal conviction for corruption was recently overturned. Yet while 54% of Brazilians see Bolsonaro’s handling of the pandemic as bad or awful, according to a March 17 Datafolha poll, his approval remains well above the single digits that presaged the impeachments of previous presidents Dilma Rousseff and Fernando Collor.

Wherever you look closely, you see how complex Latin American politics really is. In most cases, populist presidents have to reckon with powerful parliamentary bodies, in which vested interests are well entrenched; more or less independent judiciaries and central banks; not to mention independent media companies.

The real political problem in Latin America is that the elites in most countries have proved — over the 200 years since they gained their independence from Spain and Portugal — remarkably reluctant or simply unable to address the problems of the lower classes.

The recurrent pattern is, after prolonged periods of paralysis, for a far-left alternative to present itself and tear everything down, leaving nearly everyone even poorer. That is what happened in once-rich Venezuela under Hugo Chavez and Nicolas Maduro. It might conceivably be Peru’s fate, if left-wing firebrand Pedro Castillo beats his right-wing rival, Keiko Fujimori, in Sunday’s run-off election for the presidency. (It is going to be close.) During his campaign, Castillo has threatened (at times and not consistently) to redraft the constitution, bring key mining and energy sectors under direct state control, and abandon free trade.

Typically for a Latin American election, Castillo has the support of rural voters in the interior, indigenous Peruvians, younger progressives, hardened Marxists and organized labor — including Peru’s powerful teachers union. Fujimori’s base is concentrated in the metropolitan Lima area, and is educated and urban. She also polls very strongly with older voters, practicing Catholics and the wealthy. The fact that she is the daughter of Alberto Fujimori, the imprisoned former dictator, and served as his first lady in the 1990s does not seem be considered disqualifying by such voters.

Sometimes the illiberal right wins, sometimes the radical left. In the latter case, eventually, the right is restored to power and sets about turning back the clock. Then, rinse and repeat.

Typical of the dysfunction is Chile, South America’s most successful economy since the reforms of the 1980s, where a great deal of energy is soon to be consumed by the writing of a new constitution, which I suspect won’t actually do much for poorer Chileans. Latin American states love new constitutions, but these seldom address the real issues of inequality and often send countries disastrously off course (see Venezuela). Why are the Chileans changing their constitution, despite the fact that it has worked rather well? Because the last one originated under the dictatorship of Augusto Pinochet — and because a wave of protest, beginning before the pandemic, sapped the strength of the center-right government of Sebastian Pinera.

Yet as I walked the streets of Mexico City last weekend, a question kept popping into my head. All of this may long have been true of Latin America. But is it finally starting to be true of the U.S., too? A decade ago, in a book titled “Civilization,” I tried to show why the variants of European settlement in the Americas after around 1500 had produced such different outcomes in North, Central and South America, emphasizing the very different approaches to land distribution that distinguished British colonialism from Spanish and Portuguese. Whereas the initial land grab by the conquistadores and early settlers ultimately established very small property-owning elites with vast tracts of territory, in North America land continued to be distributed in relatively small parcels as new settlers arrived.

The question I asked toward the end of the book, however, was whether the U.S. was beginning in some ways to resemble Latin American countries — not just because of large-scale immigration from south of the Rio Grande, but because American inequality and U.S. institutions were turning Latin.

This same question has prompted a brilliant essay on “The Brazilianization of the World” by Alex Hochuli in the latest issue of the journal American Affairs. Because of the pandemic, he argues, “hollowed-out state capacities, politi­cal confusion, cronyism, conspir­atorial thinking and trust deficits have exposed the crumbling legiti­macy that now makes rich and powerful states look like banana republics.”

We have reached “the End of the End of History.”

Far from the world converging on Francis Fukuyama’s idea of liberal democratic capitalism, we risk converging on the Latin American fever dream: “The only people satisfied with their situation are financial elites and venal politicians. Everyone complains, but everyone shrugs their shoulders. This slow degradation of society is not so much a runaway train, but more of a jittery rollercoaster, occasionally holding out promise of ascent, yet never break­ing free from the tracks.” (If that reminds you of Marquez’s Colombia, you’ve been paying attention.)

It seems to me, however, that Hochuli is not describing a phenomenon you would encounter in continental Europe or indeed in Canada. It is the U.S. he is really talking about. And the pathologies he identifies are not peculiar to Brazil. A better framing, I think, would be the LatAmization of the U.S. For all his invective against immigrants from Central America, Trump was in many ways a very Latin American figure, with strong caudillo instincts, even if his attempt at an autogolpe, or self-coup, on Jan. 6 was a fiasco.

How far this process can be reversed will depend on whether our own Dr. Urbinos — people willing to learn the real lessons of last year’s disastrous mishandling of Covid — outnumber those who, to paraphrase Marquez, spend their lives proclaiming their proud origins, the historic merits of the country, the value of its relics, its heroism, its beauty, but are blind to the decay of the years.

In Marquez’s Colombia, “the symptoms of love were the same as those of cholera.” In America today, I wonder if the symptoms of Covid are, in a similar way, akin to those of a morbid, suffocating patriotism.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To Save the U.K. Give Scottish Nationalists the Canada Treatment

 Take it from a Scot abroad: We don't need another referendum.

Braveheartfelt. Photographer: Loic Venance/AFP/Getty Images

Scottish nationalism was my gateway drug to politics. The year was 1979. I was 15 — an age when it is easy to confuse the mood of a crowd of football fans with the case for a constitutional change. The year before, Scotland had made it to the soccer World Cup finals in Argentina. They had not progressed beyond the first round, having lost to Peru and drawn with Iran, but they had somehow managed to beat the Netherlands 3-2, and the beautiful goal scored by Archie Gemmill was engraved in all our memories.

Even more importantly, just weeks before the first referendum on Scottish devolution — which was held on March 1, 1979 — Scotland’s rugby team had held England to a 7-7 draw at Twickenham Stadium. (In Scotland a tie with the English is a “moral victory.”) I still recall the rush of adrenaline, the tingling of the spine, the readiness to fix bayonets and charge that I felt in those days when my school friends and I sang “Flower of Scotland,” the unofficial national anthem. Marx famously wrote that religion is the opium of the people. But nationalism is the cocaine of the bourgeoisie.

What happened next was cold turkey; my painful introduction to the prosaic realities of politics. The 1979 referendum asked: “Do you want the provisions of the Scotland Act 1978 to be put into effect?” This was a reference to legislation passed by the moribund Labour government of Prime Minister James Callaghan, which envisaged the creation of a Scottish Assembly. Just over half of those who voted (51.6%) said “Yes.”

However, an amendment to the act (the work of George Cunningham, a Scot who was member of Parliament for a London constituency) had required at least 40% of the total electorate to vote “Yes” or the entire act would be repealed. As turnout was just 64%, the yes vote fell short, as it represented less than a third of those eligible to vote. I was in equal measures dejected and indignant. I dimly recall at least one fistfight on the train to school with a boy who expressed satisfaction with the result.

Those days are past now, in the mawkish words of “Flower of Scotland,” and in the past they must remain. Political sentiments such as these — the intoxicating cocktail of patriotism and pugnacity — are things to be grown out of, like binge drinking and attention-seeking clothes. I went to university in England, studied history, and realized what utter rubbish it all was.

The poor, oppressed Scots, ground down by the English? King James VI of Scotland could not have been more delighted when he inherited the English crown in 1603, becoming James I.

The Scottish elite embraced the union of the nations’ parliaments in 1707 because it gave them access to English wealth after the disastrous losses of the Darien scheme (to colonize what is now Panama). As the British Empire expanded in the 18th and 19th centuries, Scots were overrepresented in almost every role, staffing the East India Company, running the Caribbean plantations, and settling the Americas and the antipodes — a central theme of my book “Empire.”

In the world wars of the 20th century, the Scottish regiments did a disproportionate share of the fighting for king and country. “Not f***ing likely, you yellow bastard!” was the reaction of one member of the 51st (Highland) Division when ordered to lay down his arms by an English officer in June 1940. Such evidence lends credence to the story about the two Highlanders watching the evacuation of the beaches at Dunkirk. “Aye, Jock,” said one to the other, “If the English surrender, it’ll be a long war.”

In peacetime, too, the U.K. has given generations of Scots far greater opportunities for advancement than they would otherwise have enjoyed. In all, 11 prime ministers can be counted as Scots (Bute, Aberdeen, Gladstone, Rosebery, Balfour, Campbell-Bannerman, Law, MacDonald, Douglas-Home, Blair and Brown), while David Cameron’s father was Ian Donald Cameron, born in Aberdeenshire. One reason the current prime minister, Boris Johnson, polls very badly in Scotland is that, although he is the American-born great-grandson of an Ottoman pasha, he has risen to power by playing the part of a caricature English toff.

Unfortunately, and partly because of Boris-itis, the utter rubbish of Scottish nationalism is back — yet again. On May 6, voters in Scotland go to the polls. The latest opinion surveys suggest that the Scottish National Party could win an outright majority. If so, they will demand a referendum on independence, which would bring the total number of referenda on Scotland’s constitutional status to four in the space of five decades.

Scotland got “devolution” at the second attempt in 1997. Soon after his landslide victory in May of that year, Tony Blair (born in Edinburgh, educated at Fettes College there) fulfilled a manifesto commitment by allowing another referendum, this time posing two questions: whether or not there should be a Scottish Parliament; and whether or not such an institution should have “tax-varying powers.”

Both questions were answered decisively in the affirmative (with 74.3% and 63.5%, respectively), and this time turnout didn’t matter. In 1999, a Scottish election was held and, for the first time since 1707, a parliament met in Edinburgh.

The canny Scots who ran the Labour Party and thus the entire U.K. in those days — not only Blair but also Gordon Brown, Donald Dewar, Robin Cook and many others — fondly imagined that devolution would draw the sting of Scottish nationalism. They were catastrophically mistaken.

Having won 56 seats out of 129 in the first Scottish election in 1999, Labour saw its representation shrivel to just 24 in 2016. The Scottish National Party took power in 2007, when it won 47 seats, and gained a majority in 2011 (69 seats). It was in the wake of that victory that Cameron agreed to a third referendum in 2014, this time on the question, “Should Scotland be an independent country?”

Full disclosure: I campaigned for a “No” vote seven years ago and was relieved when we won, 55.3% to 44.7%, despite or perhaps because of a remarkably high turnout (84.6%). That should have settled the matter, especially after the Scottish National Party lost its majority in 2016, but no.

Earlier this year, Johnson seemed determined not to yield to SNP pressure for another referendum on independence. Now, however, the Scottish Conservatives have muddied the waters: “With just four more seats,” they tweeted on April 8, “the SNP will win a majority and hold another divisive independence referendum. YOU can stop it — but ONLY by giving your party list vote to the @ScotTories.” The obvious problem with this argument is that, if it doesn’t work — if people still vote SNP in sufficient numbers to give them a majority — then another independence referendum will be rather hard to refuse.

This helps to explain the recent warning of my Bloomberg Opinion colleague Max Hastings that the U.K. is “dangerously close to an existential crisis,” not only because of the rising risk of Scottish secession, but also because of the increasingly fraught atmosphere on the border between Northern Ireland and the Republic of Ireland. (Hastings foresees “Irish reunification … within a generation.”)

For those who have lost their copies of Tom Nairn’s “The Break-Up of Britain,” published in 1977 when I was a teenage “Scot Nat,” there is a new and updated work: the Scottish journalist Gavin Esler’s “How Britain Ends.” Recent polling bears out Esler’s analysis. Support for Scottish independence surged last year, though the separatists have seen their lead dwindle in recent months, from an average of 6.3% in January to just 0.6% in March.

More striking is the evidence that the British population as a whole would not mind very much if the U.K. fell apart. In a Sunday Times poll in January, nearly half (49%) of English and Welsh voters and 60% of Northern Irish voters said they thought Scottish independence was likely in the next 10 years, and 45% of English voters said they would be either “pleased” or “not bothered” if it happened. No fewer than 71% of Scottish voters and 57% of English voters would be either “pleased” or “not bothered” by Irish reunification.

These shifts in attitudes would seem to illustrate that the only law of history is the law of unintended consequences. When the votes were cast for and against Brexit back in 2016, the divergences were almost as startling as the overall result. England and Wales voted to leave the European Union by roughly the same margin (53% to 47%). But Scotland voted to remain in the EU by 62% to 38%, and Northern Ireland by 56% to 44%.

The conventional view is that this divergence presented the SNP with a perfect opportunity to resuscitate the dream of Scottish independence. It is not just that Brexit is posing real problems for parts of Scotland’s economy. It is the fact that staying in the U.K. no longer looks as economically safe an option as it seemed to be in 2014. And now independence can be represented as a way back into Europe.

And yet, I wonder just how convincing this argument really is. Unlike in 2014, Scotland is already out of the EU but, just as in 2014, it would have to apply to rejoin it after an independence vote. There is enough opposition to separatism per se among existing member states to make this hard or, at least, slow (step forward Spain, which has its own separatists to contend with in Catalonia). And Scotland would find the waiting room already crowded with “candidate countries”: Albania, the Republic of North Macedonia, Montenegro, Serbia and Turkey. (Some would say the SNP would feel right at home in such company, as the party’s culture is much more Balkan than Baltic, much less Scandinavian.)

Independence would also create a significant headache from the point of view of national security. Since 1998, when the U.K. decommissioned its tactical WE.177 bombs, the Trident program has been Britain’s only operational nuclear weapons system. It consists of four Vanguard-class submarines based at Faslane on Gare Loch, 40 miles northwest of Glasgow. It is also rather hard to imagine the British army without the Scottish regiments ­— even if, as Simon Akam shows in his unsentimental book “The Changing of the Guard,” the Caledonian martial tradition today is a shadow of its old self.

As for the monetary and fiscal difficulties of independence, they are all but insuperable. What share of the U.K. national debt would an independent Scotland inherit? What currency would it use? The country’s biggest banks already issue their own distinctive banknotes, but they are entirely backed by Bank of England notes. Scotland could not easily adopt the euro while outside the EU (though Kosovo has done this).

And let’s not forget that the pre-1707 “pound Scots” was worth one-twelfth of an English pound. How would Scotland fare without its current subsidy from the South? “It’s Scotland’s oil” is not much of a slogan when fossil fuels are supposedly being phased out, and North Sea oil is running out anyway (production peaked in 1999, and has declined steeply since then).

Then there is the small matter of the SNP’s far-from-impressive record in running those public services that have been its responsibility for the past 14 years. First Minister Nicola Sturgeon’s boasts last year that Scotland was handling Covid-19 better than England now look hollow, while credit for Britain’s successful vaccine rollout is justly going to the U.K. government. A new report by Oxford Economics for The Hunter Foundation sheds unflattering light on Scotland’s recent economic performance, pointing to low productivity, too few startups and even less success in scaling businesses.

As for education, where the country once led both England and Europe, today Scottish pupils do worse in mathematics than those in the Czech Republic, Estonia and Slovenia — and England. Funnily enough, an independent Organization for Economic Cooperation and Development report on the state of Scottish schools won’t be appearing until after next month’s election.

If the Scots were taught their own history better, they might also be less attracted by the idea of independence. For the country’s experience prior to the Union was hardly one of unalloyed happiness. To read the historical novels of Walter Scott — notably “Waverley” (1814), “Old Mortality” (1816), “Rob Roy” (1817), “A Legend of Montrose” (1819) and “The Abbot” (1820) — is to be reminded vividly that Scotland up until the defeat of the Jacobites at Culloden in 1746 was an exceptionally violent country, characterized by bitter internecine strife between Highlanders and Lowlanders, Catholics and Calvinists, MacDonalds and Campbells.

The miracle of Scottish history is that a country that for centuries so closely resembled Afghanistan in our own time — torn apart by compulsively warring mountain clans and religious fanatics, and subject to recurrent foreign interference — should have transformed itself in the space of a generation into a cradle of the Enlightenment. As Scott observed in the postscript to “Waverley”: “There is no European nation which, within the course of half a century or little more, has undergone so complete a change as this kingdom of Scotland.”

Even in 1884, Robert Louis Stevenson (in many ways, Scott’s spiritual heir) was still struck by the fissures within Scottish society. “Two languages, many dialects, innumerable forms of piety, and countless local patriotisms and prejudices, part us among ourselves more widely than the extreme east and west of that great continent of America,” he wrote, from the safety of California. “When I am at home, I feel a man from Glasgow to be something like a rival, a man from Barra to be more than half a foreigner.” Only when the Scots were abroad, Stevenson observed, were these divisions set aside.

Recent events illustrate that Scotland remains as much a land of brutal rifts and feuds as of bonnie lochs and glens. Scott and Stevenson would surely have relished the schism that has opened up within Scottish nationalism itself between Sturgeon and her predecessor as first minister and SNP leader, Alex Salmond. Once, Sturgeon and her husband were Salmond’s proteges. But when Salmond was accused of sexual misconduct in January 2018, the dirks came out.

A governmental probe into Salmond’s conduct was dismissed by a judge as “tainted with apparent bias.” Salmond was charged with 14 offenses, including attempted rape and sexual assault, only to be acquitted. Earlier this year, Salmond told a committee of lawmakers that Sturgeon’s inner circle ran a “deliberate, prolonged, malicious and concerted effort” to damage his reputation, “even to the extent of having me imprisoned.”

Although an inquiry concluded that Sturgeon had not breached the ministerial code, enabling her to win a confidence vote comfortably last month, there is a lingering whiff of unpleasantness in the air, faintly reminiscent of a Glasgow pub the morning after a stooshie. There is sawdust on the floor and carbolic soap in the air, but specks of blood and shards of glass give the game away.

The upshot is that Salmond has launched his own party, called Alba (the Gaelic name for Scotland), and — though he insists that his goal is to advance the cause of independence — we can safely assume that it is vengeance that he wakes up in the wee small hours thinking about. For the Scottish temperament thrives on retaliation in a way the Corleone family cannot match and the English cannot fathom.

For all these reasons, the nationalists can be beaten again. But we know now that merely beating them in another referendum will not suffice. And it is at this point that the experience of another country becomes highly relevant — a country that was once second only to New Zealand when it came to the share of Scottish immigrants in its population.

As John Lloyd of the Financial Times argues in his new book, “Should Auld Acquaintance Be Forgot,” the Canadian federalists finally got the better of the Parti Quebecois after two referendums in 1980 and 1995 — the first effectively on devolution, which the separatists lost, the second on independence (“sovereignty”), which was nail-bitingly close (50.6% No vs. 49.4% Yes).

The subsequent “tough love” argument of Prime Minister Jean Chretien’s government was that it could not solely be up to a slim majority of the voters of Quebec if Canada broke up. The key role was played by Chretien’s minister of intergovernmental affairs, Stephane Dion, who in 1996 posed three carefully crafted questions to the Supreme Court of Canada.

First, was it constitutionally possible for the National Assembly, legislature or government of Quebec to effect the secession of Quebec from Canada unilaterally? Second, did international law allow such a unilateral secession?  Third, if there was a conflict between the Canadian constitution and international law, which would take precedence?

The Supreme Court’s answer was that Quebec did not have the right to secede unilaterally under either the constitution or international law. Only if Quebecers expressed a clear will to secede would the federal government be obliged to enter into negotiations with their government, but it was up to the Canadian Parliament to determine if a referendum question was sufficiently clear to trigger such negotiations. The subsequent Clarity Act enshrined this principle in legislation, along with the equally important point that a “clear majority” would need to vote in favor of secession, as opposed to “50% plus one.”  

This is how to play the game against secessionists — and it is high time that the Johnson government adopted this approach, rather than unthinkingly accepting the SNP’s argument that it has a moral right to a referendum on secession every time it wins a parliamentary election. The most impressive result of Dion’s approach has been an enduring decline in support for secession in Quebec. One recent poll found that 54% of Quebecers would vote against independence, while just 36% would vote for it. Among younger voters, support is even lower. Only those aged between 55 and 64 still narrowly favor secession.

There is, in any case, something oxymoronic about the idea of Scottish nationalism. For centuries, the Scots have been defined as a people by their absence from Scotland. (Think of the Proclaimers’ “Letter from America.”) By one estimate, the number of people outside Scotland who identify as Scots is around 18 million in the New World alone, including 6 million in the U.S. (not counting an almost equal number of Scots-Irish, meaning descendants of Ulstermen), 5 million in Canada and nearly 2 million in Australia.

There are Scots everywhere, from Dunedin to Nova Scotia, from Patagonia to Hong Kong (a city that was of course founded by Scotsmen). There are more people called Ferguson in Kingston, Jamaica, than in Dundee and Aberdeen put together.

The great Scottish historian and philosopher David Hume was always contemptuous of what he called the “vulgar motive of national antipathy.” “I am a Citizen of the World,” he wrote in 1764. That is what I learned to be after I left Scotland at the age of 17. Do I still exult at Scottish sporting victories? Yes, I do — though God knows they are few and far between.

But I no longer confuse that exultation with politics. I long ago kicked the cocaine of the bourgeoisie. And I believe it would greatly benefit the current residents of my native land to do the same.

A Taiwan Crisis May Mark the End of the American Empire

 America is a diplomatic fox, while Beijing is a hedgehog fixated on the big idea of reunification.


Diplomacy to a tee. Photographer: Tim Rue/Bloomberg

In a famous essay, the philosopher Isaiah Berlin borrowed a distinction from the ancient Greek poet Archilochus: “The fox knows many things, but the hedgehog knows one big thing.”

“There exists,” wrote Berlin, “a great chasm between those, on one side, who relate everything to … a single, universal, organizing principle in terms of which alone all that they are and say has significance” — the hedgehogs — “and, on the other side, those who pursue many ends, often unrelated and even contradictory” — the foxes.

Berlin was talking about writers. But the same distinction can be drawn in the realm of great-power politics. Today, there are two superpowers in the world, the U.S. and China. The former is a fox. American foreign policy is, to borrow Berlin’s terms, “scattered or diffused, moving on many levels.” China, by contrast, is a hedgehog: it relates everything to “one unchanging, all-embracing, sometimes self-contradictory and incomplete, at times fanatical, unitary inner vision.”

Fifty years ago this July, the arch-fox of American diplomacy, Henry Kissinger, flew to Beijing on a secret mission that would fundamentally alter the global balance of power. The strategic backdrop was the administration of Richard Nixon’s struggle to extricate the U.S. from the Vietnam War with its honor and credibility so far as possible intact.

The domestic context was dissension more profound and violent than anything we have seen in the past year. In March 1971, Lieutenant William Calley was found guilty of 22 murders in the My Lai massacre. In April, half a million people marched through Washington to protest against the war in Vietnam. In June, the New York Times began publishing the Pentagon Papers.

Kissinger’s meetings with Zhou Enlai, the Chinese premier, were perhaps the most momentous of his career. As a fox, the U.S. national security adviser had multiple objectives. The principal goal was to secure a public Chinese invitation for his boss, Nixon, to visit Beijing the following year.

But Kissinger was also seeking Chinese help in getting America out of Vietnam, as well as hoping to exploit the Sino-Soviet split in a way that would put pressure on the Soviet Union, America’s principal Cold War adversary, to slow down the nuclear arms race. In his opening remarks, Kissinger listed no fewer than six issues for discussion, including the raging conflict in South Asia that would culminate in the independence of Bangladesh.

Zhou’s response was that of a hedgehog. He had just one issue: Taiwan. “If this crucial question is not solved,” he told Kissinger at the outset, “then the whole question [of U.S.-China relations] will be difficult to resolve.”

To an extent that is striking to the modern-day reader of the transcripts of this and the subsequent meetings, Zhou’s principal goal was to persuade Kissinger to agree to “recognize the PRC as the sole legitimate government in China” and “Taiwan Province” as “an inalienable part of Chinese territory which must be restored to the motherland,” from which the U.S. must “withdraw all its armed forces and dismantle all its military installations.” (Since the Communists’ triumph in the Chinese civil war in 1949, the island of Taiwan had been the last outpost of the nationalist Kuomintang. And since the Korean War, the U.S. had defended its autonomy.)

With his eyes on so many prizes, Kissinger was prepared to make the key concessions the Chinese sought. “We are not advocating a ‘two China’ solution or a ‘one China, one Taiwan’ solution,” he told Zhou. “As a student of history,” he went on, “one’s prediction would have to be that the political evolution is likely to be in the direction which [the] Prime Minister … indicated to me.” Moreover, “We can settle the major part of the military question within this term of the president if the war in Southeast Asia [i.e. Vietnam] is ended.”

Asked by Zhou for his view of the Taiwanese independence movement, Kissinger dismissed it out of hand. No matter what other issues Kissinger raised — Vietnam, Korea, the Soviets — Zhou steered the conversation back to Taiwan, “the only question between us two.” Would the U.S. recognize the People’s Republic as the sole government of China and normalize diplomatic relations? Yes, after the 1972 election. Would Taiwan be expelled from the United Nations and its seat on the Security Council given to Beijing? Again, yes.

Fast forward half a century, and the same issue — Taiwan — remains Beijing’s No. 1 priority. History did not evolve in quite the way Kissinger had foreseen. True, Nixon went to China as planned, Taiwan was booted out of the U.N. and, under President Jimmy Carter, the U.S. abrogated its 1954 mutual defense treaty with Taiwan. But the pro-Taiwan lobby in Congress was able to throw Taipei a lifeline in 1979, the Taiwan Relations Act.

The act states that the U.S. will consider “any effort to determine the future of Taiwan by other than peaceful means, including by boycotts or embargoes, a threat to the peace and security of the Western Pacific area and of grave concern to the United States.” It also commits the U.S. government to “make available to Taiwan such defense articles and … services in such quantity as may be necessary to enable Taiwan to maintain a sufficient self-defense capacity,” as well as to “maintain the capacity of the United States to resist any resort to force or other forms of coercion that would jeopardize the security, or the social or economic system, of the people on Taiwan.”

For the Chinese hedgehog, this ambiguity — whereby the U.S. does not recognize Taiwan as an independent state but at the same time underwrites its security and de facto autonomy — remains an intolerable state of affairs.

Yet the balance of power has been transformed since 1971 — and much more profoundly than Kissinger could have foreseen. China 50 years ago was dirt poor: despite its huge population, its economy was a tiny fraction of U.S. gross domestic product. This year, the International Monetary Fund projects that, in current dollar terms, Chinese GDP will be three quarters of U.S. GDP. On a purchasing power parity basis, China overtook the U.S. in 2017.

Middle Kingdom, Top Performer

Shares of global GDP based on purchasing power parity

Source: International Monetary Fund, World Economic Outlook Database, October 2020

*Estimates start after 2019

In the same time frame, Taiwan, too, has prospered. Not only has it emerged as one of Asia’s most advanced economies, with Taiwan Semiconductor Manufacturing Co. the world’s top chip manufacturer. Taiwan has also become living proof that an ethnically Chinese people can thrive under democracy. The authoritarian regime that ran Taipei in the 1970s is a distant memory. Today, it is a shining example of how a free society can use technology to empower its citizens — which explains why its response to the Covid-19 pandemic was by any measure the most successful in the world (total deaths: 10).

As Harvard University’s Graham Allison argued in his hugely influential book, “Destined for War: Can America and China Escape Thucydides's Trap?”, China’s economic rise — which was at first welcomed by American policymakers — was bound eventually to look like a threat to the U.S. Conflicts between incumbent powers and rising powers have been a feature of world politics since 431 BC, when it was the “growth in power of Athens, and the alarm which this inspired in Sparta” that led to war. The only surprising thing was that it took President Donald Trump, of all people, to waken Americans up to the threat posed by the growth in the power of the People’s Republic.

Trump campaigned against China as a threat mainly to U.S. manufacturing jobs. Once in the White House, he took his time before acting, but in 2018 began imposing tariffs on Chinese imports. Yet he could not prevent his preferred trade war from escalating rapidly into something more like Cold War II — a contest that was at once technological, ideological and geopolitical. The foreign policy “blob” picked up the anti-China ball and ran with it. The public cheered them on, with anti-China sentiment surging among both Republicans and Democrats.

Trump himself may have been a hedgehog with a one-track mind: tariffs. But under Secretary of State Mike Pompeo, U.S. policy soon reverted to its foxy norm. Pompeo threw every imaginable issue at Beijing, from the reliance of Huawei Technologies Co. on imported semiconductors, to the suppression of the pro-democracy movement in Hong Kong, to the murky origins of Covid-19 in Wuhan.

Inevitably, Taiwan was added to the list, but the increased arms sales and diplomatic contacts were not given top billing. When Richard Haass, the grand panjandrum of the Council on Foreign Relations, argued last year for ending “strategic ambiguity” and wholeheartedly committing the U.S. to upholding Taiwan’s autonomy, no one in the Trump administration said, “Great idea!”

Yet when Pompeo met the director of the Communist Party office of foreign affairs, Yang Jiechi, in Hawaii last June, guess where the Chinese side began? “There is only one China in the world and Taiwan is an inalienable part of China. The one-China principle is the political foundation of China-U.S. relations.” 

So successful was Trump in leading elite and popular opinion to a more anti-China stance that President Joe Biden had no alternative but to fall in line last year. The somewhat surprising outcome is that he is now leading an administration that is in many ways more hawkish than its predecessor.

Trump was no cold warrior. According to former National Security Adviser John Bolton’s memoir, the president liked to point to the tip of one of his Sharpies and say, “This is Taiwan,” then point to the Resolute desk in the Oval Office and say, “This is China.” “Taiwan is like two feet from China,” Trump told one Republican senator. “We are 8,000 miles away. If they invade, there isn’t a f***ing thing we can do about it.”

Unlike others in his national security team, Trump cared little about human rights issues. On Hong Kong, he said: “I don’t want to get involved,” and, “We have human-rights problems too.” When President Xi Jinping informed him about the labor camps for the Muslim Uighurs of Xinjiang in western China, Trump essentially told him “No problemo.” On the 30th anniversary of the 1989 Tiananmen Square massacre, Trump asked: “Who cares about it? I’m trying to make a deal.”

The Biden administration, by contrast, means what it says on such issues. In every statement since taking over as secretary of state, Antony Blinken has referred to China not only as a strategic rival but also as violator of human rights. In January, he called China’s treatment of the Uighurs “an effort to commit genocide” and pledged to continue Pompeo’s policy of increasing U.S. engagement with Taiwan. In February, he gave Yang an earful on Hong Kong, Xinjiang, Tibet and even Myanmar, where China backs the recent military coup. Earlier this month, the administration imposed sanctions on Chinese officials it holds responsible for sweeping away Hong Kong’s autonomy.

In his last Foreign Affairs magazine article before joining the administration as its Asia “tsar,” Kurt Campbell argued for “a conscious effort to deter Chinese adventurism … This means investing in long-range conventional cruise and ballistic missiles, unmanned carrier-based strike aircraft and underwater vehicles, guided-missile submarines, and high-speed strike weapons.” He added that Washington needs to work with other states to disperse U.S. forces across Southeast Asia and the Indian Ocean and “to reshore sensitive industries and pursue a ‘managed decoupling’ from China.”

In many respects, the continuity with the Trump China strategy is startling. The trade war has not been ended, nor the tech war. Aside from actually meaning the human rights stuff, the only other big difference between Biden and Trump is the former’s far stronger emphasis on the importance of allies in this process of deterring China — in particular, the so-called Quad the U.S. has formed with Australia, India and Japan. As Blinken said in a keynote speech on March 3, for the U.S. “to engage China from a position of strength … requires working with allies and partners … because our combined weight is much harder for China to ignore.”

This argument took concrete form last week, when Campbell told the Sydney Morning Herald that the U.S. was “not going to leave Australia alone on the field” if Beijing continued its current economic squeeze on Canberra (retaliation for the Australian government’s call for an independent inquiry into the origins of the pandemic). National Security Adviser Jake Sullivan has been singing from much the same hymn-sheet. Biden himself hosted a virtual summit for the Quad’s heads of state on March 12.

The Chinese approach remains that of the hedgehog. Several years ago, I was told by one of Xi’s economic advisers that bringing Taiwan back under the mainland’s control was his president’s most cherished objective — and the reason he had secured an end to the informal rule that had confined previous Chinese presidents to two terms. It is for this reason, above all others, that Xi has presided over a huge expansion of China’s land, sea and air forces, including the land-based DF‑21D missiles that could sink American aircraft carriers.

While America’s multitasking foxes have been adding to their laundry list of grievances, the Chinese hedgehog has steadily been building its capacity to take over Taiwan. In the words of Tanner Greer, a journalist who writes knowledgably on Taiwanese security, the People’s Liberation Army “has parity on just about every system the Taiwanese can field (or buy from us in the future), and for some systems they simply outclass the Taiwanese altogether.” More importantly, China has created what’s known as an “Anti Access/Area Denial bubble” to keep U.S. forces away from Taiwan. As Lonnie Henley of George Washington University pointed out in congressional testimony last month, “if we can disable [China’s integrated air defense system], we can win militarily. If not, we probably cannot.”

As a student of history, to quote Kissinger, I see a very dangerous situation. The U.S. commitment to Taiwan has grown verbally stronger even as it has become militarily weaker. When a commitment is said to be “rock-solid” but in reality has the consistency of fine sand, there is a danger that both sides miscalculate.

I am not alone in worrying. Admiral Phil Davidson, the head of U.S. forces in the Indo-Pacific, warned in his February testimony before Congress that China could invade Taiwan by 2027. Earlier this month, my Bloomberg Opinion colleague Max Hastings noted that “Taiwan evokes the sort of sentiment among [the Chinese] people that Cuba did among Americans 60 years ago.”

Admiral James Stavridis, also a Bloomberg Opinion columnist, has just published “2034: A Novel of the Next World War,” in which a surprise Chinese naval encirclement of Taiwan is one of the opening ploys of World War III. (The U.S. sustains such heavy naval losses that it is driven to nuke Zhanjiang, which leads in turn to the obliteration of San Diego and Galveston.) Perhaps the most questionable part of this scenario is its date, 13 years hence. My Hoover Institution colleague Misha Auslin has imagined a U.S.-China naval war as soon as 2025.

In an important new study of the Taiwan question for the Council on Foreign Relations, Robert Blackwill and Philip Zelikow — veteran students and practitioners of U.S. foreign policy — lay out the four options they see for U.S. policy, of which their preferred is the last:

The United States should … rehearse — at least with Japan and Taiwan — a parallel plan to challenge any Chinese denial of international access to Taiwan and prepare, including with pre-positioned U.S. supplies, including war reserve stocks, shipments of vitally needed supplies to help Taiwan defend itself. … The United States and its allies would credibly and visibly plan to react to the attack on their forces by breaking all financial relations with China, freezing or seizing Chinese assets.

Blackwill and Zelikow are right that the status quo is unsustainable. But there are three core problems with all arguments to make deterrence more persuasive. The first is that any steps to strengthen Taiwan’s defenses will inevitably elicit an angry response from China, increasing the likelihood that the Cold War turns hot — especially if Japan is explicitly involved. The second problem is that such steps create a closing window of opportunity for China to act before the U.S. upgrade of deterrence is complete. The third is the reluctance of the Taiwanese themselves to treat their national security with the same seriousness that Israelis take the survival of their state.

Thursday’s meeting in Alaska between Blinken, Sullivan, Yang and Chinese Foreign Minister Wang Yi — following hard on the heels of Blinken’s visits to Japan and South Korea — was never likely to restart the process of Sino-American strategic dialogue that characterized the era of “Chimerica” under George W. Bush and Barack Obama. The days of “win-win” diplomacy are long gone.

During the opening exchanges before the media, Yang illustrated that hedgehogs not only have one big idea – they are also very prickly. The U.S. was being “condescending,” he declared, in remarks that overshot the prescribed two minutes by a factor of eight; it would do better to address its own “deep-seated” human rights problems, such as racism (a “long history of killing blacks”), rather than to lecture China.

The question that remains is how quickly the Biden administration could find itself confronted with a Taiwan Crisis, whether a light “quarantine,” a full-scale blockade or a surprise amphibious invasion? If Hastings is right, this would be the Cuban Missile Crisis of Cold War II, but with the roles reversed, as the contested island is even further from the U.S. than Cuba is from Russia. If Stavridis is right, Taiwan would be more like Belgium in 1914 or Poland in 1939.

But I have another analogy in mind. Perhaps Taiwan will turn out to be to the American empire what Suez was to the British Empire in 1956: the moment when the imperial lion is exposed as a paper tiger. When the Egyptian president Gamal Abdel Nasser nationalized the Suez Canal, Prime Minister Anthony Eden joined forces with France and Israel to try to take it back by force. American opposition precipitated a run on the pound and British humiliation.

I, for one, struggle to see the Biden administration responding to a Chinese attack on Taiwan with the combination of military force and financial sanctions envisaged by Blackwill and Zelikow. Sullivan has written eloquently of the need for a foreign policy that Middle America can get behind. Getting torched for Taipei does not seem to fit that bill.

As for Biden himself, would he really be willing to jeopardize the post-pandemic boom his economic policies are fueling for the sake of an island Kissinger was once prepared quietly to trade in pursuit of Cold War detente? Who would be hurt more by the financial crisis Blackwill and Zelikow imagine in the event of war for Taiwan – China, or the U.S. itself? One of the two superpowers has a current account deficit of 3.5% of GDP (Q2 2020) and a net international investment position of nearly minus-$14 trillion, and it’s not China. The surname of the secretary of state would certainly be an irresistible temptation to headline writers if the U.S. blinked in what would be the fourth and biggest Taiwan Crisis since 1954.

Yet think what that would mean. Losing in Vietnam five decades ago turned out not to matter much, other than to the unfortunate inhabitants of South Vietnam. There was barely any domino effect in Asia as a whole, aside from the human catastrophe of Cambodia. Yet losing — or not even fighting for — Taiwan would be seen all over Asia as the end of American predominance in the region we now call the “Indo-Pacific.” It would confirm the long-standing hypothesis of China’s return to primacy in Asia after two centuries of eclipse and “humiliation.” It would mean a breach of the “first island chain” that Chinese strategists believe encircles them, as well as handing Beijing control of the microchip Mecca that is TSMC (remember, semiconductors, not data, are the new oil). It would surely cause a run on the dollar and U.S. Treasuries. It would be the American Suez.

The fox has had a good run. But the danger of foxy foreign policy is that you care about so many issues you risk losing focus. The hedgehog, by contrast, knows one big thing. That big thing may be that he who rules Taiwan rules the world.


This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

The Fed Doesn’t Fear Inflation. Its Critics Have Longer Memories

 Milton Friedman saw the great uptick of the 1970s coming, and Larry Summers has similar warnings today. Jerome Powell would do well to listen.

High velocity. Photographer: Andrew Harrer/Bloomberg

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

It was in a lecture delivered in London in 1970 that Milton Friedman uttered those famous words, the credo of monetarism.

Over the previous five years, inflation in most countries had been on the rise. In the first half of the 1960s, U.S. consumer prices had never gone up by more than 2% in any 12-month period. The average inflation rate from January 1960 until December 1965 had been just 1.3%. But thereafter it moved upward in two jumps, reaching 3.8% in October 1966 and 6.4% in February 1970.

For Friedman, this had been the more or less inevitable consequence of allowing the money supply to grow too rapidly. The monetary aggregate known as M2 (cash in public hands, plus checking and savings accounts, as well as money market funds) grew at an average annual rate of 7% throughout the 1960s. Moreover, as Friedman pointed out in his lecture, the velocity of circulation had not moved in the opposite direction.

What no one knew in 1970, though Friedman certainly suspected it, was that much worse lay ahead. By the end of 1974, U.S. consumer prices were rising at more than 12% a year. The “great inflation” of the 1970s (which was only really great by North American standards) peaked in early 1980 at 14%. Friedman’s London audience had an even rougher ride in store for them. U.K. annual inflation hit 23% in 1975. That year, as an 11-year-old schoolboy, I wrote a letter to the Glasgow Herald (my first ever publication) that bemoaned the price of shoes, because I could see my mother’s sticker shock each time I needed a new pair. Prices were rising significantly faster than my feet were growing — and that was saying something.

In recent weeks, investors have been acting in ways that suggest they fear a repeat of at least the first part of that history — the 1960s, if not the 1970s. On Thursday, Federal Reserve Chair Jerome Powell made the latest of multiple attempts by Fed officials to reassure markets that they have nothing to fear from a temporary bout of higher inflation as the U.S. economy emerges from the Covid-19 pandemic. In response, you could almost hear the chants of “always and everywhere a monetary phenomenon.” After all, the latest M2 growth rate (for January) is 25.8% — roughly twice the rate at inflation’s peaks in the 1970s. (Yes, I know velocity is way down.)

The crucial indicator in this debate is inflation expectations. These can be measured in various ways, but one of the best is the so-called breakeven inflation rate, which is derived from five-year Treasury securities and five-year Treasury inflation-indexed Securities, and tells us what market participants expect inflation to be on average in the next five years. Less than a year ago, that expected inflation rate was down to 0.14%. Last Wednesday it was at 2.45%. The last time it was that high was in April 2011.

Highest in a Decade

Source: Fred

Another indicator of market anxiety is the steepening of the yield curve (though that could well be capturing growth expectations as well as inflation fears). In the shock of the pandemic, the yield on 10-year Treasuries fell as low as 0.6%. Now it is up to 1.56%. Because the yields of government bonds with shorter maturities have not moved up so much, the widening spread can be seen as a further sign that markets expect inflation.

Yields Bounce Back

Source: FRED

To some observers, including Fed economists, all this seems like market overreaction. The Fed’s preferred measures of inflation, derived from the price indices of personal consumer expenditures, have consistently undershot the 2% inflation target for most of the period since the global financial crisis. In only 10 months out of the 149 since Lehman Brothers Inc. went bust has core PCE (excluding the volatile costs of energy and food) exceeded 2%. The latest reading is 1.5%. Indeed, average core inflation has been 1.9% for the past 30 years — since the presidency of George H. W. Bush. In any case, the economy is only just emerging from one of the biggest supply shocks in economic history — the lockdowns and other “non-pharmaceutical interventions” to which we resorted to limit the spread of the SARS-CoV-2.

The Decline of Inflation

Source: FRED

Looking at the past three decades, you can see why the Fed subscribes to what might be called the Mad Magazine view of inflation: “What, me worry?” Last month, Powell said, “Frankly we welcome slightly higher … inflation. The kind of troubling inflation people like me grew up with seems unlikely in the domestic and global context we’ve been in for some time.”

Since last September, the Fed has pledged to keep its Fed funds rate at near zero and its bond purchases (quantitative easing) going until the labor market has made “significant progress” in recovering from the Covid shock. In very similar speeches last week, Fed Governor Lael Brainard and Mary Daly, president of the San Francisco Fed, reiterated this commitment. It’s not just that they don’t worry about inflation above 2%. They actively want inflation above 2% because they are now targeting an average rate of 2%.

In making this argument, the Fed folks are telling us that post-pandemic inflation will be so fleeting as to leave expectations essentially unchanged. “A burst of transitory inflation,” in Brainard’s words, “seems more probable than a durable shift above target in the inflation trend and an unmooring of inflation expectations to the upside.” Those who worry about such an unmooring, argued Daly, are succumbing to “the tug of fear … a memory of high and rising inflation, an inexorable link between unemployment, wages and prices, and a Federal Reserve that once fell behind the policy curve. But the world today is different, and we can’t let those memories, those scars, dictate current and future policy … That was more than three decades ago, and times have changed.”

Now, I plead guilty to having worried about inflation prematurely in the past, something for which I was vehemently (and unfairly) criticized by Paul Krugman and others. Eleven years later, I am not about to repeat that mistake. Yes, the administration of President Donald Trump ran the economy hot with big tax cuts and browbeat the Fed to abandon its planned normalization of monetary policy — and even at 3.5% unemployment, inflation barely moved. Yes, as Skanda Amarnath and Alex Williams very reasonably argue, the reopening of services such as bars and restaurants will likely push up PCE inflation, but not by much and only temporarily. Only if inflation is sustained and accompanied by equally sustained wage inflation would the Fed need to change its stance.

Yet this entire debate has been turned on its head by the intervention of former Treasury secretary and Harvard University President Lawrence Summers. Back in 2014, it was Summers who resurrected the idea of “secular stagnation,” predicting (correctly, as it proved) that the period after the global financial crisis would be characterized by sluggish economic performance and very low interest rates. There was therefore some consternation in the world of economics when Summers published a stinging critique of President Joe Biden’s proposed $1.9 trillion fiscal stimulus on Feb. 4.

“There is a chance,” warned Summers, “that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”

At this point, we need to make our first qualification of Friedman’s monetarist credo. Actually, inflation is often and in many places a fiscal phenomenon — or at least, you don’t get inflation without a combination of fiscal and monetary expansion. Summers’s point is that the proposed fiscal stimulus is far larger than the likely output gap, insofar as that can be estimated. Even before the additional stimulus, Summers wrote, “unemployment is falling, rather than skyrocketing as it was in 2009, and the economy is likely before too long to receive a major boost as Covid-19 comes under control. ... Monetary conditions are [also] far looser today than in 2009. … There is likely to be further strengthening of demand as consumers spend down the approximately $1.5 trillion they accumulated last year.”

Although economists working for the Biden administration and Democratic Party operatives shot back, Summers’s argument was endorsed by other big hitters, notably Olivier Blanchard, only recently a proponent of active fiscal policy. Martin Wolf, a rampant Keynesian in the period after the financial crisis, called the stimulus plan “a risky experiment.”

Even investors who don’t share my respect for these academic economists could hear a version of the same argument from two of the great financial market players. “Bonds are not the place to be these days,” wrote Warren Buffet in the latest Berkshire Hathaway report. “My overriding theme is inflation relative to what the policymakers think,” Stan Druckenmiller said in an interview. “Basically the play is inflation. I have a short Treasury position, primarily at the long end.”

Time for a further amendment to Friedman’s credo. Like the equation that encapsulates the quantity theory of money (MV=PQ), the assertion that inflation is always a monetary phenomenon verges on being a tautology. In truth, monetary expansions, like the fiscal deficits with which they are often associated, are the result of policy decisions, which are rooted in decision-makers’ mental models, which originate in some combination of experience and study of history. The Fed folks are telling us that inflation expectations will stay anchored, even if inflation jumps above 2% for a time. The big beasts of economics and investment may just have longer memories. Both Blanchard (72) and Wolf (74) are old enough to remember the 1960s, and both refer to what happened then with good reason.

Our own time has quite a lot in common with the 1960s, as I argued last June in the first column I wrote for Bloomberg Opinion. True, the Woodstock generation was into free speech, whereas the Wokestock generation wants to cancel it, but there’s the same sense of a generation war. There’s a crazy right, too, as we saw on Jan. 6. It’s just that today the arguments for separating black and white students are made on the crazy left.

The economic similarities are there, too. The economists who served in the John F. Kennedy and Lyndon B. Johnson administrations — such as Walter Heller of the University of Minnesota — had as much faith in the power of fiscal policy as those now serving under Biden.

“Our present choice,” declared Kennedy, “is not between a tax cut and a balanced budget. The choice, rather, is between chronic deficits arising out of a slow rate of economic growth, and temporary deficits stemming from a tax program designed to promote … more rapid economic growth.” The 1964 budget, which cut both individual and corporate tax rates, testified to the dominance of Keynesian ideas at that time. The only difference is that by today’s standards, the deficits of the 1960s were tiny, peaking at 2.8% of gross domestic product — a figure regarded as so excessive that in 1968 Congress passed the Revenue and Expenditure Control Act, effectively reversing the 1964 tax cuts.

As in our time, the Fed was confident that there was a stable tradeoff to be exploited between inflation and unemployment. As Allan Meltzer showed in his history of the Fed, the easing of monetary policy in 1967 was a grave error, one recognized by Fed Chair William McChesney Martin by the end of that year (“the horse of inflation not only was out of the barn but was already well down the road”). An important difference was the distorting effect of the Fed’s Regulation Q, which imposed interest rate ceilings on savings accounts in 1965, discouraging saving, boosting consumption, and limiting the effective transmission of monetary policy.

Then, as now, the global financial system revolved around the dollar, to the annoyance of European leaders such as President Charles de Gaulle of France, who complained of the American currency’s “exorbitant privilege.” The difference was that the dollar was still linked to gold under the Bretton Woods rules of (mostly) fixed exchange rates. Fears that the U.S. might break the link to gold and devalue the dollar — which were fulfilled by Richard Nixon in August 1971 — may have played a part in pushing up inflation expectations.

In a seminal paper first published in 1981, the economist Thomas Sargent argued that “big inflations” ended only when there was “an abrupt change in the continuing government policy, or strategy, for setting deficits now and in the future that is sufficiently binding as to be widely believed.” The corollary of this insight must be that inflations begin with a comparable regime change, but one that is imperceptible rather than abrupt.

Sargent elaborated on this point in his 2008 presidential address to the American Economic Association, in which he argued that policymakers might easily form “incorrect views about events that are rarely observed.”

The situation that we are always in [is] … that our probability models are misspecified. … The possibility [exists] that learning has propelled us to a self-confirming equilibrium in which the government chooses an optimal policy based on a wrong model … Misguided governments [fall into] lack-of-experimentation traps to which self-confirming equilibria confine them.

This nicely encapsulates the mistakes made at the Fed in the 1960s. It might well turn out to describe the mistakes being made at the Fed right now. Thirty years of very low inflation seems like the perfect basis for a wrong model.

There is one important caveat, nevertheless. The biggest difference between our own time and the 1960s is that we are coming out of a pandemic, whereas then the U.S. was sliding deeper into a disastrous war. Economic historians have long been aware that, for most of history, war has been the principal driver of moves in inflation expectations. Pandemics have generally not had this effect. The reason for this is clear. Over the long run, wars are the most common reason why governments run large budget deficits and are tempted to debase the currency. And wars that go wrong are especially likely to end in either debt default or inflation or both.

Thanks to the Bank of England, we can take a long, hard look at the history of British inflation expectations since the late 17th century. The striking point is that five out of the six biggest moves in expectations occurred in time of war — especially (as in 1917 and 1940) when the war was going badly.

Britain’s Ups and Downs

Source: Bank of England


Though the economics literature has little to say on the subject, I find it hard to believe that television news coverage of the deteriorating situation in Vietnam — for example, the Tet Offensive of 1968, which the U.S. networks misrepresented as a triumph for the North Vietnamese army and the Vietcong — played no part in the upward shift in American inflation expectations. 

I would become a lot more worried about the prospects for U.S. inflation if our current Cold War II with China escalated into a full-blown hot war or even a serious diplomatic crisis over, say, Taiwan — which is a good deal more likely than I suspect most investors appreciate, as Robert Blackwill and Philip Zelikow pointed out last week.

Still, the British experience in the mid-1970s is a reminder that war is not a sine qua non for inflationary liftoff — or that the wars can be someone else’s, as was the case when the Arab states attacked Israel in 1973, the trigger for the oil shock that most people wrongly think of as the principal cause of the great inflation. Ultimately, inflation expectations can be untethered by a combination of excessive fiscal and monetary laxity without a shot being fired. If a pandemic has the financial consequences of a major war, that may suffice.

Lest anyone doubt the scale of the fiscal shock attributable to Covid-19, the latest projections from the Congressional Budget Office are now available. Even if the short-run outlook is less dire than last year’s exercise, the reality is inescapable: Not only is the federal debt in public hands now at its highest level relative to GDP since the year after World War II, but it is also forecast to soar to double that level by 2050. These are drastically worse projections than we were contemplating in 2009 and 2012.

Washington's Skyrocketing IOUs

Federal debt in public hands as a share of GDP

Source: Congressional Budget Office

The conclusion is not that inflation is inevitable. The conclusion is that the current path of policy is unsustainable. The Fed may control short-term rates but it cannot really allow long-term interest rates to rise rapidly because of the problems this would create for highly leveraged entities, including the federal government itself. This is the “unpleasant fiscal arithmetic” that inevitably arises when the stock of debt rises to approximately the level of total economic output.

On the other hand, the Fed cannot comfortably engage in full-spectrum yield-curve control without creating a situation of financial repression and fiscal dominance reminiscent of the late 1940s, another time of rapid inflation. To quote a recent paper from the St. Louis Fed, “if the Fed were to adopt such a policy and if the public perceives that the Fed is engaged in deficit financing, then it is possible that inflation expectations could rise.”

In the late 1940s and in the late 1960s, economic cooling was done by raising taxes. But no one in the new administration is talking about that, though the progressives in Congress are itching to tax the rich. On the contrary, the key members of Team Biden, notably Treasury Secretary Janet Yellen, all think the lesson of history is to “go large or go home” with deficit spending: the $1.9 trillion stimulus is the first of a number of big spending measures in prospect, with green new infrastructure next up. But that’s only the lesson of very recent history — to be precise, the first term of the Barack Obama administration, in which so many of today’s key players served.

In Charles Dickens’s “Great Expectations,” the orphan Pip comes into a fortune from an anonymous benefactor and embarks on the life of a gentleman — hence his great expectations. Only later does it become clear that the money comes from a dubious source and it ends up being lost altogether: “My great expectations had all dissolved, like our own marsh mists before the sun.”

It may ultimately be that our great expectations of inflation will dissolve in a similar way, vindicating Powell and making fools of aged economists and bond vigilantes alike. But the resemblances between our situation and the one Milton Friedman described in 1970 are striking — even if it is not quite true that inflation is always and everywhere a monetary phenomenon.


Niall Ferguson is the Milbank Family Senior Fellow at the Hoover Institution at Stanford University and a Bloomberg Opinion columnist. He was previously a professor of history at Harvard, New York University and Oxford. He is the founder and managing director of Greenmantle LLC, a New York-based advisory firm.


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