On the surface, Robert Johnson’s career looks like the stereotypical case of somebody who has made it in finance.
Educated at the country’s elite schools of Harvard and MIT, and having worked as a managing director at George Soros’s Quantum Fund in the 1990s, and having held a prominent role in Washington, his résumé could not be more established.
However, Johnson never took his achievements for granted and always kept on pushing further, looking for the real stuff behind the facades of modern finance and politics.
As a result, he has produced an Oscar-winning documentary,”Taxi to the Dark Side," exposing torture practices within the U.S. military. He also founded and heads the nonprofit The Institute for New Economic Thinking (INET), where he managed to step outside the box of partisan politics and economic theory to find some pragmatic solutions to our future problems.
Epoch Times spoke to Johnson about China’s new role in the world as well as its domestic challenges, Europe’s faltering welfare system, and America’s income inequality. Expect the unexpected.
Epoch Times: Your institute follows so many topics, but you said China is a big one, and you know Epoch Times is big on China as well, so why don’t we talk about that for a minute.
Robert Johnson: Sure. Well I think what they call the changing of the guard in world leadership has been a topic that’s been on many peoples’ minds in recent years—very different systems between the United States and China.
There are different sensibilities about what works, what doesn’t work, how ownership is constructed, and how these work together in a world system. The simplest measure is the the exchange rate. All of these aspects of what you might call the architecture of a global system, depend very much on the relationship between the United States and China.
Epoch Times: How do you see that relationship developing at this moment? It has been tense recently.
Mr. Johnson: When I spoke of the changing of the guard—it was bulky and difficult to change from British leadership to American leadership—but you had two cultures that came from the same philosophical and historical traditions.
And it was still difficult. Here we have very different philosophical and historical traditions called the Enlightenment liberalism of the West and the Confucian-Daoism-Buddhism sensibilities in China, and the philosophies that underpin each.
Then you narrow it down to a rising power with a population five times the size of the United States, and there is only so much water, land, and other resources. Who holds sway?
Right now, as you know, from the coastal tensions there is an acute what I'd call test match going on. At one of our recent panels at INET, James Kurth, who is a defense expert based at Swarthmore College, talked about how the Chinese will continue to pressure, and the Americans will continue to define the line.
The Chinese will negotiate compromises, but they will come back and look for new opportunities to pressure, because they see themselves not only as rising, but returning to that station of leadership that the Middle Kingdom once represented.
Epoch Times: What can the United States do to manage that?
Mr. Johnson: I think the United States first, and at its core, has to remain economically prosperous. If it’s economically prosperous, if its citizens are well educated, and if its citizens are participating with sophistication in the political process, it becomes more supple, more flexible, more contented, and therefore less likely to lurch into a violent reaction to the challenge of China.
Also, if our resource base, our human capital, and everything is strong, we can maintain our national defense without concerns. In a weaker society, defense has to be maintained while schools and infrastructure deteriorate. You'll start to sow the seeds of social discord and America will not appear credibly strong and durable in the eyes of the Chinese.
Epoch Times: What about China becoming part of the International Monetary Fund’s (IMF) reserve currency (SDR)?
Mr. Johnson: In my simple technocratic opinion; that’s long overdue. The Chinese play a much bigger role, as do the Indians and others, and their voting power [at the IMF] is very, very small in relation to that.
The European countries, as a whole, are very important to the IMF, but the individual countries—Belgium, Spain, and so forth—have voting power way disproportionate to their roles in the world economy or the size of their populations.
So I think adjustments are called for. I think adding the renminbi to the SDR is forthcoming. I’m not sure it‘ll happen right away, but next year—I think 2016 it’ll very likely be adopted, and I see telltale signs of that in Washington.
Epoch Times: Can you elaborate on that?
Mr. Johnson: I just see discussions going on. I see Christine Lagarde’s [IMF managing director] leadership. The concern is about the U.S.’s veto power, the United States congressional approval of the budget, and what accommodations are made to China.
It’s a very difficult dance, but I think it is in the U.S.’s best interests. I also think it’s incumbent on the president, or the economic leaders and the business leaders, to persuade Congress that this is a natural evolution that China becomes part of the SDR, that China continues to work with multilateral institutions rather than springing away and forming their own.
China’s initiates, like the regional Chiang Mai initiative [regional currency swaps in Asia] and the Asian Infrastructure and Investment Bank, foreshadow the possibility of the system breaking into different blocks. I think this would be a worse outcome for the United States and that this should be reflected in how Congress ultimately decides.
Epoch Times: China will exert power one way or another. Either it does it alone or it does it within the system—and it’s less costly, for both parties actually, to do it in the system.
Mr. Johnson: That’s right. You learn in economics, in the discipline called Game Theory, that there are cooperative games that can be played and we’re better off if we can achieve those things. They are often unstable; they’re difficult to enact and they’re difficult to sustain, but if you can get to that cooperative place, everyone’s better off.
Epoch Times: What about the Chinese economy now? That was one source of the power; the invincibility, the growth, the foreign currency reserves. Things have slowed down a bit.
Mr. Johnson: Well in the longer scheme of things I think that from the time of Deng Xiaoping there was an invitation to Western technology and knowhow to come in via foreign direct investment.
The Chinese people are very brilliant and they have assimilated and understood and adapted. And then the crisis of 2008 happened, which you might say derailed the export-led growth model.
The Chinese responded with infrastructure development and real estate construction. That capacity is very much built up now, maybe excess capacity in construction in some regions.
So it won’t be the driver of the next chapter. I’m talking in a 20–25 year timeframe (I’m not talking in the next three quarters), consumer spending would be the engine of growth for the Chinese development.
They have to make some environmental changes because the air quality has been so bad and I think they’re on their way to doing that. If the Chinese in a 20-year time frame will reorient toward domestic demand, everybody will want to export to them.
They won’t need as much foreign technological assistance so a more nationalist policy is very likely. But it will be bumpy in the interim. The transition from exports and construction to domestic consumer demand is not just a simple turning of dials. It’s a bumpy political economy.
Epoch Times: Now the real estate bubble is deflating, the stock market bubble is inflating, there are a lot of bad things in the system, what can the regime do?
Mr. Johnson: Unlike the systems that are more mature and dependent on markets, I would say China is the biggest Keynesian [economy] in the world.
And the state administration can offset declines like you said, real estate declines and other things, and so they can smooth out the pain and not be subject to an acute crisis like we had in 2007 and 2008.
But the cost of smoothing is making a deeper debt hole that will ultimately need restructuring, and so the question that the Chinese leading officials need to consider is, “For how long do we postpone, and for how long do we have to wait before the reforms that create more vibrant consumer markets take hold?”
Epoch Times: Yes, they don’t necessarily have to collapse, and there won’t be a crisis but it will be like a Japanese scenario where it’s very low growth for quite some time.
Mr. Johnson: I think that’s quite possible. The Japanese precedent is very interesting. And the Japanese of course allowed the exchange rate to become much stronger. I don’t think the Chinese are going to be quite so willing to collapse the exports sector. Their adjustment will be more gradual over time.
Epoch Times: Talking about the exchange rate, what we see actually on the transaction side, we see a lot of capital flowing out of China. Putting pressure on the downside.
Mr. Johnson: With the anti-corruption campaign, the leadership’s concern over the princelings, great concentrations of wealth, political and social instability, it would be natural for those wealthy people to diversify their portfolios internationally.
A portfolio readjustment leads to capital outflows, or at least changing currency denominations and the location of where the assets are held. They are moving more toward London, Switzerland, and New York, and away from keeping the money inside China.
Epoch Times: What are some of the things you see on your trips to China? You mentioned food and also migration?
Mr. Johnson: Well I’m very interested in a constellation of issues. One is the modernization of the Chinese financial system, and the international integration of that system with the renminbi liberalization.
There are still a large number of people in China that live at a subsistence level, particularly in rural areas. Those areas can be very sensitive to the exchange rate based on imports, what you might call primary goods, grain, and so forth.
Big swings in the exchange rate [as part of liberalization], extreme undervaluation and extreme overvaluation at times could lead to a lot of social stress on those rural areas, and require domestic or compensatory policies to take the sting out of those adjustments.
So I think exchange rate liberalization as a kind of snap your fingers and shock treatment, or big bang, is quite a dangerous policy. That interests me a great deal.
The second is food. I’ve done a lot of studies and read a lot of other studies. I’ve been studying the role of fish proteins.
As people move to urban areas they want to consume more proteins. So it’s pork, beef, and fish. The ocean is not big enough with the natural stock of fish, given the size of the population. So are fish farms viable, and what kind of side effects for water and side effects for pollution are involved?
My conclusions are that you will have to consume more beef and import more feed grains into China in order to meet this challenge. And the fish farming is not likely to be the first order solution that some hoped it would be.
The role of human waste in all of Scotland for example is of the same order of magnitude of the waste at the salmon farms. So you can’t imagine that scale of waste to manufacture fish in farms for China, because the sheer scale of China would overwhelm the environment.
I also look at the question of migration from rural to urban areas, the congestion in the urban areas, how the younger generations become educated so you have a peaceful assimilation in urban areas. I think that’s an enormous challenge for that country.
This interview has been edited for brevity and clarity.
Robert Johnson is president of the Institute for New Economic Thinking, and a senior fellow and director of the Project on Global Finance at the Roosevelt Institute in New York. He had previously worked with George Soros as a managing director at the Quantum Fund and as a chief economist of the U.S. Senate Banking Committee.
Friends Read Free