Fan Favorite: 25 Years of Markets

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0:35This is Wall Street Week. I'm David Weston bringing you stories of capitalism. This time, not for just a week, not for just a year, but stories of the arc of capitalism over the first quarter of the 21st century. It's been an especially eventful 25 years, from Y2K to the great financial crisis to the pandemic, giving us a lot to adjust to and learn from, starting with profound changes in the economy. Our colleague Michael McKee starts us with an economic overview. We are fortunate to be alive at this moment in history. Unemployment was low. The economy was booming. Never before has our nation enjoyed at once so much prosperity and social progress with so little internal crisis.

1:28Trees don't grow to the sky and at some point there would have to be a reckoning.

1:36We're in the midst of a serious financial crisis. Everybody's house was probably overvalued. Anybody who had a mortgage might have a mortgage problem coming up. Today does mark the beginning of the end. By the time we got to the American Recovery Act, it was a question of what would it take to get people spending again and businesses investing again. The economic recovery appears to be proceeding at a moderate pace, though somewhat more slowly than the committee had expected. We got to 2015 and you still had problems because we had a manufacturing recession then, brought about by the collapse in oil prices.

2:19The wealth of our middle class has been ripped from their homes and then redistributed all across the world. A lot of Americans suffered because the factories went away, the businesses went away, and that gave rise to the MAGA movement. Make America Great Again. In 2019, things had started to look better. The unemployment rate was very low. Growth was picking up, which is the irony of the pandemic. Today, I am officially declaring a national emergency. COVID did shut down the economy, and it shut it down very fast. And we saw that in the largest unemployment rate since the Great Depression. First is providing checks and pockets and shots in arms.

3:10Inflation started to take hold and then an inflation psychology started to take hold. We're very strongly committed to using our tools to get inflation to come down. It is a situation now where everything seems to combine to make people feel more nervous and more unhappy about their situations. When it comes to the economy, we always start with the numbers. And for the numbers, we often turn to Torsten Slock, chief economist at Apollo, with the help of people like Harvard's Jason Furman to interpret those numbers for us. The first 25 years of the 21st century have been eventful for a lot of us, but particularly for economists.

3:55Looking back at the 2000 now and where we are today, what's the biggest change or surprise you've seen? See, the thing I'm most surprised about is that the interest rates are so low, despite the budget deficit and the debt being what, to my 2000 eyes, would have been unimaginably high. So what accounts for that, do you think? What do you think we got wrong and what we would have anticipated? Look, in 2000, I was working in the Clinton administration. We balanced the budget three years in a row. We were on track to fully pay off all the debt. At the time, I believed in that and thought that was good and important.

4:37Turns out, I think we had a lot more room for borrowing than we ever appreciated at that time. We're certainly spending when we need to spend it. Are we saving it when we need to say it? Yeah, look, I think we spent too little in the financial crisis. I think we spent too much in COVID. Those were both hard calls to make in real time, it's a much easier call that we shouldn't be running$2 trillion deficits in a year when the economy is growing perfectly fine. We have seen a growth in income and wealth inequality. To what extent is that attributable to some of the things we felt we needed to do to stimulate the economy?

5:13It tended to go, I think, to the people who had capital and not to people who did not have capital. I put the last quarter century in context of the last three quarter centuries. And if I had to rank them, the best one in terms of inclusive growth, strong economic growth, broadly shared, was 1950 to 1975. The worst was actually 1975 to 2000, where we had much slower economic growth and an enormous widening of just about every way to measure inequality. The story from 2000 to 2025 is a little bit more complicated and nuanced. There were some facets of inequality, like wealth inequality have risen.

5:56Other things like wage inequality has actually been falling for more than a decade now. There's been stronger wage growth for the median household than there was in the 25 years before. And so the story is actually a little bit more positive for the last quarter century than it was in the quarter century before, just not as positive as it should and could have been with the right policies. Thorsten, looking back over the first 25 years of the new century, let's talk about some major themes, one of which is inflation. We thought it was all gone away and then it came back. Well, for a very long period, the whole research agenda and also the statements from the Federal Reserve was that inflation was not quite at 2 percent.

6:41It was 1.8, 1.7. And so much time was spent in financial markets thinking about how can we get inflation up by that 0.1, 0.2 percent more. And obviously that changed dramatically when we found out that inflation was not dead in 2020. So what is a very important feature of what has happened in the last 25 years is that inflation can come back under certain circumstances. And this becomes very important when we look into 2026, namely, are the circumstances still here for inflation potentially to begin to move higher next year? Which leads us to what were the larger forces that kept inflation down and have they gone away?

7:16Well, a very important force that was keeping inflation down was globalization. It was the case after China entered the WTO 25 years ago, that goods were coming out of China and was holding goods prices down. At the same time, immigration globally also went up. That also means that the cost of labor and wage inflation was also held down. So those forces were weighing on inflation for literally two decades after 2000, because we saw inflation therefore simply not move much away from 2%. COVID again has, of course, been moving upward pressure on goods prices. And now more recently, when we've had restrictions on immigration, we've also begun to see more upward pressure on wage inflation.

7:57So that's also, therefore, beginning to become an issue looking into next year. Deglobalization and restriction on immigration could drive wages up. On the other hand, artificial intelligence seems to be on the brink of really making a difference the other way. That's true. So AI is, of course, also a very important development over the last 25 years. We have certainly seen some very significant technological advances. We've not quite yet seen that show up in wage inflation or even in the unemployment rate. So therefore, there's a lot of discussion about data centers, AI, large language models, voice recognition, etc.

8:29But at the end of the day, we're not quite yet seeing the productivity gains in the dramatic way that is holding inflation down. One of the big developments in the last 25 years has been ways that the U.S. and European economies have diverged. Stephanie Flanders, Bloomberg's head of economics and government, explains just how differently they've developed. At the beginning of the century, you would have said the big project that the European countries were embarking on was the single currency and a much broader single currency, a much broader collection of countries joining the euro than had previously been anticipated.

9:07And there were lots of risks in that. And we can talk about how they managed that. But I think it's fair to say there ended up being a lot of other things on their plate. and we saw the financial crisis, we saw COVID. And these were crises that in different ways, I would say the European governments did not always respond too well, but they did, as one senior policymaker said, European governments do the right thing when they're all on the window ledge looking down. The euro was a very big move. It came under a lot of siege over the last 25 years. I mean, certainly great financial crisis put everything under stress.

9:45But then we also had the, I'll call it the Greek crisis, when there were people literally speculating the euro might not survive. I would say in the first few years of the euro, there was a kind of false calm and a sense of great achievement on the part of European leaders that turned out to be also complacency. They were all borrowing at the same rate almost, not taking into account those differences. And ultimately, the imbalances that were caused by that was why you had not just a crisis in Greece, but actually a broader Eurozone crisis. But I would say it's a game of two halves because the second half, the years since the global financial crisis and the Eurozone crisis, have been, although they were very painful for countries like Portugal, Greece, Spain, Ireland, they've also, that period of crisis and adjustment has produced some convergence.

10:37Are you moving toward something beyond convergence into really coordination on the fiscal side? Very slowly, David, I would say we are moving in that direction. And we've seen a little bit more flexibility on that front from German governments in the last few years. But boy, that has been a very slow process. And I think it is still an area where the politics has yet to really catch up with the economics. The history of the EU has been getting bigger for the most part for a good long time, with one notable exception. It got smaller in the first 25 years with Brexit. What has that done to the economy of the UK and of Europe?

11:16The deal the UK actually negotiated with the EU turned out to be actually a lot worse than I think any of us would have reasonably expected. We wouldn't have expected such an extreme version, a hard Brexit, as they call it. That has ended up, I mean, the estimates range from 5 % to 7 % of GDP hit at a time when, as you know, all European countries and certainly the UK have struggled to have very much growth. I would also say it's affected the capacity of the UK to respond and move forward in other areas because so much effort and political energy was absorbed by that long period after 2016, after the referendum, trying to negotiate and then trying to pass a deal with the EU.

12:02Looking forward to the next 5, 10, 25 years, what's the best case for Europe, if not entirely catching up, getting headed in the right direction in terms of closing the gap with the United States and goodness knows China? So, I mean, obviously, in recent weeks, we've had talk of, you know, civilization erasure, I think, was in the Trump administration's national security strategy. I think we could probably dodge that. But I do think there's a serious kind of question of governability in some of the core economies. In terms of growth rates, I think your best case is sort of, you know, certainly no more than 1%, probably more in the kind of half the percent a year range.

12:41Coming up, we turn from the first quarter of the century in economics to the ways in which China has transformed itself and surprised some of us along the way.

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14:03As we continue our review of the first quarter of the 21st century, we turn to one country that has been a story, well, really many stories in and of itself. Our colleague Enda Curran takes us through China's remarkable transformation.

14:21China joining the WTO in 2001 was probably one of the most consequential decisions, not just for China's economy, but for the world economy. The WTO agreement will move China in the right direction. So companies could shift there and both tap into the Chinese market and, of course, export from China to the rest of the world. The slowdown is not only in the developed countries. It will also become a sharp slowdown in the developing countries. The global financial crisis reverberated all around the world. China is going forward with a half trillion dollar stimulus package. It will build schools and subways, power plants and hospitals.

15:04China played a crucial role in stepping up, spending that money, generating all of that demand and activity. And in that period, China did become the world's second biggest economy.

15:17China will spend$40 billion to establish the Silk Road Fund. The Belt and Road positioned China as someone who was willing to invest and a source of new capital at a time when capital was becoming scarcer. They invested into ports, they invested into rail networks, they invested into motorways. Well, China has been a victim of its own economic success in so many ways. As China moved up the value chain, then it became a threat to some of those Western economies that had been doing business with China in the first place. We've been ripped off by China. No longer are the doors just open for free two-way trade.

15:55China had the virus under control, so they took opportunity and I really took a leap in terms of electric vehicles and in lithium batteries in particular. Clearly, that window was when the rest of the world was caught napping. China was doing just fine. It wasn't until later when China started to impose restrictions on its real estate sector and its real estate sector started to slow down that you began to see some of the brakes being hit on China's economy. The problem being that homebuyers are afraid to buy homes, worried about distressed developers not being able to deliver on the homes a year later.

16:30The slump has been going on for several years now, and I think it has taken some of the gloss off of China's economy for the rest of the world.

16:39Afsani Beshlas of Rock Creek and Elizabeth Economy of the Hoover Institution have spent a good part of the last 25 years traveling to the Middle Kingdom and coming back to try to make sense of it for us. They looked back at some of the country's biggest changes and challenges. Elizabeth, you've been going to China for quite a few years now. As we look back over the first 25 years of this century, how has China changed? The transformation has been extraordinary, of course. I think if you look back to 2000, for example, China was an economy of$1.2 trillion. GDP per capita was around$1 ,000. And it was making more bicycles than cars.

17:19It was very much trying to adapt its domestic politics and economics to the demands of the international community. What we see today is pretty radically different from what we saw in 2000. Its GDP per capita now is$13 ,000. Of course, it's not making bicycles so much anymore as, you know, the most EVs, electric vehicles in the world, and cutting-edge electric vehicles, largest manufacturer, consumer, and exporter. Today, you have China saying, you know, we're front and center and we'd like the international community to adapt to us. So what you have is China no longer being a rule taker, but a rule maker.

17:55I know you've just recently been in China. How does it feel on the ground, as it were, over there? It is a tale of two Chinas in many respects. Driving around in Beijing, there's no traffic. There's a kind of gray pall that seems to have settled over the city. The economic activity is not what you might expect. You don't see cranes dotting, you know, the landscape, a lot of new building and enthusiasm. You don't have the sense of a dynamic economy. But when you meet with Chinese officials and you meet with, you know, Chinese tech leaders, you definitely have a sense of confidence. And, you know, the Chinese officials believe that they have a model that works.

18:32And that model is investing in technology. I visited an EV factory where they're producing 300 ,000 EVs in a year, and they only have 2 ,100 people on their factory floors. And the factory is spotless. You could eat off the floor. It's extraordinary. And they are very confident. They're confident about their ability to compete with the United States. They're confident that they're on the right trajectory. Again, though, I think for the broader swath of Chinese people, consumption is not rebounded. They're not feeling it. This is very much an economy of haves and have-nots. And the haves are moving ahead very aggressively.

19:07One of the things we've seen over the last 25 years is a migration, first of all, into the middle class, from the rural into the urban setting. Is that continuing? I think it's one of the interesting things that we haven't seen the middle class continue to expand. And the Chinese are just beginning to wake up to the fact that artificial intelligence and their move toward robotics, you know, they already have 250 ,000 robots. I think We have about 10 ,000, you know, in their factories operating. They're going to put people out of work. And so one of the factories that we visited was an autonomous vehicle factory.

19:40And the person who was, you know, taking us on the sort of tour of the factory said that they are now being told by the local government that they're going to need to help find jobs for the people that their autonomous vehicles supplant. At the same time, the local government's not allowing them to charge any more than regular taxi drivers or Didi drivers because they don't want those people to go out of work. So I think they have not figured out how they're going to manage the technological change and the demands for employment. How much success has China already had in reshaping the international community?

20:14I would say much less than we might anticipate. It doesn't seem as though much of the rest of the world is interested in trading the current international system for a China-led international system. That being said, if you're looking for Chinese technological influence or economic influence globally, certainly the Belt and Road and the Digital Silk Road have been transformative. Look at Huawei, which has, you know, 70 percent of the 4G in Africa. Their satellite system now rivals GPS. So I think they can look at any number of metrics and say we've had a success. At the same time, of course, there have been protests in virtually every Belt and Road country about how China's done business.

20:57Interest and the desire, the willingness to have Chinese investment stems from the fact that they can't get that kind of investment from any other country. So I think, you know, if we were to go in and really be competitive, for example, in Africa, in this idea that we're going to promote our tech stack globally, I think we'd be welcomed. Do we understand in the West just how far ahead China is getting in some respects in technology and manufacturing? I think most people think of China as producing consumer goods, their toys, you know, basic goods. and that is the way they started. But today, it's a whole other world.

21:35So what is happening is most of us are now reliant on not just their basic ingredients being made, but the new molecules being developed in China, EV cars, let's say. The batteries that they are producing are so far ahead than the ones we're producing. So they are jumping ahead in ways that we did not expect. They might have less power constraints the way they're building nuclear plants and the way they're using clean energy and renewable energy, the opposite of what we're doing in the U.S. And that's because the government in China is putting so much capital to work alongside the private sector, something that in the most recent past we're not doing.

22:15What is that enormous move forward for China as an economy, as a government, for the people of China? So if we look at the people of China when this whole process started 20, 25 years ago, there was hope. They were growing fast, double-digit growth. A lot of opportunities for people to get new jobs, move from agriculture to industry into cities, and get out of that extreme poverty. And right now, what's happening, because of the overcapacity, let's say, if you're producing EV cars, you might be getting paid less because they have the overcapacity. You're lucky to have a job. So the situation for the individual may not have got better, but China as a whole continues to do well.

23:02I think one thing that I found very interesting is we in the U.S. always say China should start consuming more. And if they consume more, they will export less. We will have less of a problem and they will deal with their growth with domestic consumption. What is very clear with President Xi, but also really maybe people who came before him, they're not interested in domestic consumption. They're interested in world supremacy, as has become evident. So you need to do the quantum. You need to do the AI. You need to be ahead on robotics. You need to be ahead on producing things so that you control your own destiny, but potentially you control other people's destiny.

23:46And I think that's what we've missed, really realizing ourselves here. How have Chinese relations with the United States and with the West changed over these 25 years? Obviously, when we had the Nixon and the Kissinger period and the opening up and WTO, it was the West hoping that China would open up to U.S. goods and to a more liberal democratic system. And as one went to China and you would talk to your Chinese counterparts, it was always a very open dialogue. What has been very different the last few years is that China has become more closed. If there's one thing that is changing with the Chinese, because they've always been very careful in how they show their hands to the rest of the world, they are showing more overconfidence than before.