McKinsey Global Institute

Forward Thinking on economies beyond COVID-19 with Michael Spence

A Nobel laureate explores postpandemic prospects, explaining why his cautious optimism about the economic recovery has been replaced by concern related to the slow vaccine rollout in lower-income economies, fragile supply chains, and extreme weather events.

In this episode of the McKinsey Global Institute’s Forward Thinking podcast, co-host Janet Bush speaks with distinguished economist Michael Spence. He is professor of economics and dean emeritus at the Stanford Graduate School of Business, senior fellow at the Hoover Institution at Stanford, senior professor at SDA Bocconi, and Nobel laureate in Economic Sciences, 2001.

Spence reflects on some of the major shifts and challenges ahead, from rolling out vaccine programs in lower-income economies to tackling climate change. He answers questions like:

  • Is the current fragility in supply chains a sign that something more fundamental is happening that could affect the course of globalization?
  • Will new ways of working that emerged during the pandemic persist and, if so, what are the broader economic implications?
  • Are you even more worried about rising inequality now than before the pandemic?
  • Are you optimistic or pessimistic about COP26, the UN Climate Change Conference?
  • Can you see a silver lining to this pandemic?
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Forward Thinking on economies beyond COVID-19 with Michael Spence

An edited transcript of this episode follows. Subscribe to the series on Apple Podcasts, Google Podcasts, Spotify, Stitcher, or wherever you get your podcasts.

Podcast transcript

Janet Bush (co-host): In today’s podcast, I will be talking to Michael Spence, one of the world’s most distinguished economists, with a Nobel Prize in economics, no less.

Michael Chui (co-host): I’ll hasten to add that it isn’t actually a requirement to have a Nobel Prize to be on our podcast. We haven’t been going that long, and we have been fortunate to have several. It’s an extremely interesting time to talk to him, with so much uncertainty about the trajectory of the global economy. And he touches on so many topics that are core areas of research for MGI: productivity, inequality, supply chains, and the future of work.

Janet Bush: Yes, and overlaid on all those aspects of economies is the extreme weather events that we’ve seen in many parts of the world, which Mike talks about a lot. Climate risk was the subject of a major MGI report just before the pandemic hit last year, and Mike was very keen to talk about that issue.

Michael Chui: I am very much looking forward to Mike’s insights. Over to you, Janet.

Janet Bush: Mike, thanks so much for joining us. It’s a real pleasure. You’re obviously a very modest person, but I have to mention that you won the Nobel Prize in Economic Sciences, and therefore we think of you as an economist through and through. But I noticed that you did a philosophy degree to start off with. And then maths and then economics. And I was intrigued by whether your philosophical background affected the way that you think about economics.

Michael Spence: I think it does, actually. I had a very influential course at Princeton, taught by the late Robert Nozick. It was called Social Philosophy. There were a number of influential courses for me. But that one actually did affect not so much what I would call a sort of scientific side, if there is one, to economics, but the normative side. You know, whether you’re thinking in terms of Rawls or John Stuart Mill or so on, I think the philosophical background actually did have an impact on me.

Janet Bush: In what way, if I may ask?

Michael Spence: One of the things I try to be careful about, in my own mind but also when I’m writing or even speaking, is to be clear whether I’m trying to be, you know, “scientific.” Janet, I mean whether I’m trying to describe the way the world works as it works, as distinct from the way a person might hope the world works, which don’t always coincide. And sometimes when people are speaking, they go back and forth between those two very quickly. And it confuses people. The question of whether something is a good structural description of how the world works (in this respect, it’s how the economy works) is a different thing than the normative statements about what things are right, what things are wrong, what policies are needed to change direction, and so on. Being sensitized to the normative statements and their underpinnings influenced me.

I’ll say one other thing about it. People talk about growth all the time. But if you listen carefully, there’s usually an unstated, implicit model lying behind it, or some framework that they use to think about how growth works. But the interesting thing is if you start trying to guess at what that model looks like, it frequently doesn’t have anything to do much with reality, and it certainly varies a lot from person to person as well.

Janet Bush: Sure. And speaking of reality, we can’t have a conversation without talking about COVID-19. I guess you were in Italy, Mike. And were you there when the pandemic broke out and was so serious in northern Italy?

Michael Spence: Just barely. We were in New York, on an urgent mission to renew my wife’s green card, which was going to expire. We flew back overnight on a Saturday, arriving on a Sunday morning, and four hours later they closed the schools.

Janet Bush: Wow [laughs]. It’s a crazy world out there.

Michael Spence: It’s crazy [laughs]. It was pretty scary at the start, because we didn’t know what we were dealing with. I don’t pretend to understand the epidemiology of this, but the outbreak was really serious in the north here, in places like Bergamo.

Janet Bush: Looking back on it now—we’re still in the middle of it. I read an article that you coauthored that said that the United States is spending 8,000 times more per capita [on economic support in response to the pandemic disruption] than the least developed economies in the world, which is quite an extraordinary figure. And back in April 2020, you were one of the signatories to a letter to the G-20 leadership calling for immediate international action. And yet it hasn’t materialized. What’s your feeling about that?

Michael Spence: It’s a very good question. For those of us who at least spend part of our time worrying about the people who live in a broad range of developing countries and emerging economies—and it’s a significant group—we could see that the vaccine, once it arrived, the initial distribution was going to be heavily influenced by nationalism.

I personally didn’t think that was outrageous. I mean, our elected leaders, especially in a democracy, don’t last very long if they don’t look out first for the people who elected them. And so I knew that was inevitable. The real issue was, could we get that done quickly, and ramp up supply and get rid of a host of potential obstacles so that the second wave could be a massive vaccine program, especially in the lower-income developing countries? Because they were the ones at the end of the queue.

And that’s what’s not happened, for a variety of reasons. I mean, people have different takes on it, but roughly speaking, key ingredients are the institutions that you could think of as being involved in making it happen, like COVAX [a global initiative aimed at equitable access to COVID-19 vaccines], like the UN, and so on. They really don’t have the clout to get it done.

Second, I learned this recently: the developed economies have optioned a huge amount of vaccine manufacturing going forward. And the latest estimate I heard is that we collectively—there’s the US, the UK, Europe, and Canada—have optioned approximately two billion doses more than we could conceivably need if we vaccinated all children and did booster shots.

I think what we’re now hoping—I’ve been at the periphery, kind of involved in this—but I think to break through this impasse, it’s going to take the leadership of the major players. So it’s the G-20, the United States, and the United Kingdom.

Janet Bush: You’ve also talked about the IMF playing a role in supporting developing economies, making sure money’s available, even restructuring debts. None of that has happened, as far as I know—or has it?

Michael Spence: No. I think the hope was the excess SDR [special drawing rights] allocations to the developed world could simply be donated, in effect, to the lower-income developing countries to expand their fiscal space to respond. My impression is that’s in process, but it hasn’t really happened. All of those things are kind of in play, but I think the urgent thing right now—there’s one other important point. People have done estimates of the total cost of vaccinating the world, right? I mean, if you just get on with it.

And even stretching, even at the upper end, a number like $100 billion seems to be reasonable. And lots of estimates are below that. That is trivial compared to the cost of not getting the job done and variants developing in unvaccinated populations and so on. So this really is an example of—it’s not just international cooperation. It’s a very important issue with a big component of self-interest up to the top of the agenda in terms of priorities.

Janet Bush: In terms of the risk to the economy, you were fairly optimistic about the global recovery maybe even a couple of months ago. The vaccine was rolling out. I guess we had hope that the vaccine would also get to developing economies. We’ve also seen this sort of fragility of supply chains, and you are much more pessimistic. I think one part of it is the sort of nationalism, or you could even say selfishness or inertia or whatever, in terms of the actual pandemic.

But let’s look at supply chains, because it’s very intriguing. We see a boat stuck in the Suez Canal. We see a port in Shenzhen close because of a COVID outbreak. But is there something more happening? Because when you look at the way the governments have reacted over the vaccine—“Let’s bring manufacturing home,” “Let’s make our own stuff,” “We can’t rely on anybody else”—do you think there’s a chance that this is more fundamental than just a crisis response to a pandemic? Is something else going on that will affect the course of globalization?

Michael Spence: Janet, I think there may very well be. On the global supply chains, I have to say, this is not something that’s well understood. Meaning I don’t think there’s adequate research that would enable anybody, including me, to make definitive statements about the origin. But it’s clear that the global supply chains are sort of clogged up and congested. And it looks like they’re going to be that way for a much longer period of time than anybody expected.

I think that the kind of implicit assumption, perhaps, that many of us made is that, well, they were kind of knocked on their heels like everything else. But when the global economy came back, and demand surged in various economies in a few sectors, the supply chains were elastic. They’d respond. And it’s clear they’re not. You can’t have 24 months of semiconductor backlog, an automobile industry shutting down, and so on, and not think that something fundamental may have changed.

Now, having said that, I think at this point we’re sort of guessing. There’s probably risk aversion and changes in things like inventories that have implications for where risk lies in global supply chains. So a bunch of more conservative behavior would probably push you in the direction that we’re actually observing. Global supply chains are highly decentralized, right? They were operating under market forces, but we delivered a tremendous shock to them.

Getting them back and running, in a kind of coordinated way, in a structure that has no centralized coordinating capability other than market incentives—which are not trivial—they don’t operate instantly.

But when you look across the board, you’ve got semiconductors, containers, construction materials. Even the labor market is starting to look like it’s behaving differently than the way it used to in the prepandemic period. So bottom line is, I think we’ve got some homework and research to do.

Janet Bush: Interesting that you mention the labor market, because that was one of the big questions in my mind. We’ve obviously seen a big trend break, if you like. For years we’ve been talking about working flexibly from home or in a hybrid way. And that suddenly just became a reality. And it looks like everybody loves it.

I mean, look at us. I’m sitting in my home in the west of England. You’re sitting in your home in Italy. And we’re just chatting away. It’s so easy. So there’s that side of that. Do you think that this way of working will persist, and what are the implications of it, the broader economic implications of that?

Michael Spence: I think parts of it will persist. Maybe not a revolutionary change, but it’s important to be humble. When you’re undergoing things that could be potentially large changes, it’s really quite difficult to know with any degree of certainty what the endpoint will be.

But it certainly looks like this has opened eyes, changed patterns, changed people’s awareness, and businesses’ as well, of the art of the possible. And then you have more concrete factors. The latest writing I’ve seen on international travel, especially business travel, sort of sounds like it’ll never come back the way it was before. But that may be overdone a bit. I don’t think people will fly around to have meetings when they can do it this way going into the future. But at a slightly deeper level, the labor market, at least in the United States, is starting to look like it really is different, you know? I mean, there’s lots of people quitting. There’s lots of people deciding to retire early. There’s lots of people moving. It feels like a big change.

Janet Bush: And what do you think’s going on there?

Michael Spence: At a fundamental level, people’s priorities sometimes shift in the context of a big shock. These are driven by values, but they maybe say, “Gee, there’s more important things in life than running on the treadmill in a major financial center.” You have a much better sense of what’s going on in London than I do. But this has gone on long enough that now the major players in New York—not all of them, but a fair number of them—are saying, “Well, the full opening, meaning whatever version of it we’re going to get, will come at earliest in the early part of 2022.”

We’ve been at this for a long time. I think people are asking fundamental questions about where do they want to live, how do they want to live, lifestyle.

Janet Bush: It’s been a revelation that being at home is kind of fun. You see your kids more, and it’s more flexible, and it’s perfectly doable. But the option to opt out and have a better work-life balance and have some fun, to put it mildly, depends on money and whether you have the means to take that choice. It was clear, I think, and MGI has written about this quite a lot, that the impact of the pandemic has been highly regressive. It’s hit those on low incomes. It’s hit women. And we’ve also at the same time seen definitely a stepping up in digitization, very possibly a stepping up in the pace of automation. And so the threat to those with low skills—they’re the people who don’t work in offices, who can’t work at home so easily.

Looking at all that—and I know that you and all of us are very aware of rising inequality—how do you see all that going? Are you even more worried now than you were before?

Michael Spence: I think so. The proposition that the pandemic was a negative shock from a distributional point of view is clearly right and well documented, both domestically in many economies but also internationally. As you go through the income spectrum, it gets worse the further down you get.

So that part’s clear. Now you overlay the digital economy revolution, which is a phenomenon that was well under way before and will continue when we’re finished with this. And the pandemic accelerated it. It’s [an] important element of the digital revolution to the extent that there are complex transitions to make during which there are distributional challenges. They’re now more severe because of the speed with which it’s happening, because of the acceleration that we just experienced.

The proposition that the pandemic was a negative shock from a distributional point of view is clearly right and well documented, both domestically in many economies but also internationally. As you go through the income spectrum, it gets worse the further down you get.

I tend to think of it in terms of a transition. And then it’s hard to know what the endpoint equilibrium is, but we know that there’s a huge amount of potential in this digital transformation of our economies. And it’s going to proceed. I don’t see [that] there’s any way to stop it. But there will be places where there’s big changes: shrinking sectors, shrinking classes of employment, and so on. It’s going to be a tough and rocky period. Maybe all big transitions like that are, but I’m pretty sure that’s true of this one. So it’s a real challenge, yes.

Janet Bush: We’ve talked for a long time, and MGI talks about this a great deal, about the imperative to reskill, but it’s such a big thing. And it takes a huge amount of effort and a lot of resources, and I often wonder whether anything like what is needed is actually going to transpire.

Michael Spence: I’m slightly hopeful about that, on two fronts. One, if you look at governments of the major economies, they are starting to talk as if they have an important role in this, as they do in climate change.

And secondly, the business community, under the multistakeholder model, under ESG [environmental, social, and governance], recognizing that they have an important role in these transitions, whether it’s the energy transition or the digital transition. And with a focus on people and helping them get through it.

I’m sure you can find pockets of sort of cynical engagement. But on the whole, it looks to me like those two major chunks of the economy are more engaged and serious about it. If you look at it from a long point of view, at least in America, we have adverse distributional trends that go back at least 20 years, probably more.

I think the Biden administration is serious about rectifying the distributional aspects of growth patterns, or at least tackling it. Now, what they get through Congress is a different question. But if the test is “is anybody paying attention?,” I think the answer’s yes.

Janet Bush: I love the fact that you came up with, I think the phrase was “cynical engagement” by business and ESG [laughs]. I was actually going to ask you, in the context of climate change—which you mentioned and I definitely wanted to talk to you about—whether the noise, the positive noise about doing something about climate change, doing something about reskilling, is cynical engagement. Or is there something big potentially going on where business knows that it has to respond, particularly in the case of climate change? Obviously, in terms of reskilling, they need the skills. In terms of climate change, the evidence is stacking up that this is a huge risk to business and a huge risk to economies. MGI has written about climate risk extensively. Is it real, what’s going on in terms of the business response, do you think?

Michael Spence: I think it’s real. If these risks are real, then we’re going to see asset prices change depending on their exposure to risk. Insurance systems are going to prove woefully inadequate, but they’re real. They’re important prices. And in addition, for businesses that have employees and customers who care, they can’t just ignore them, right?

In some sense there’s an identification problem. It’s hard to know if you’re all going in the same direction. But the bottom line is, you and I can find examples of people who are just sort of going with the flow and hoping to not have to do too much [laughs]. I think the majority are moving swiftly in the opposite direction.

Janet Bush: And it’s getting serious. We have the IPCC [Intergovernmental Panel on Climate Change] now saying, “OK, we’re going to hit the 1.5-degree warming by 2040. We’ve got COP26 coming up.” Do you agree that this is a sort of critical time? And are you pessimistic or optimistic about COP26?

Michael Spence: I’m sort of mildly pessimistic. We’ve been talking about this for some time. The summer UN panel report basically said, “You know what? We started 20 or more years too late.” You take a look around you—we had extreme climate events at higher frequency, greater severity, and globally in terms of scope: floods in China, floods in Turkey, you name it. Pick drought, pick fires, floods in Germany. They didn’t say, “I told you so.” But they basically said, “So the time to prevent that kind of thing has passed.” And so what you see around you now is the new climate normal for the next 20 years. Period. That window has closed.

Nevertheless, if we do nothing, then the second half of the century is going to be pretty unpleasant, to put it mildly. And there is a big job to do. They were kind of walking a fine line. They were trying to be honest in saying, “Mitigation to the point of preventing fairly dramatic climate change is not an option anymore. But there is an important agenda before us.”

And so then the question is, are we going to get there? Meaning will the COP26 produce significant increases in the ambition of the national-level plans so that they come out vaguely resembling some kind of carbon budget that’s consistent with holding at 1.5 degrees Celsius?

Paris was a big challenge. This one is a very, very big challenge because at the margin, getting those commitments in the aggregate, to the point that they’re consistent with some reasonable carbon dioxide budget, it’s risky, scary, potentially expensive, and so on.

The flip side of that is if everybody’s on board, there’s some exciting opportunities in terms of growth patterns and even employment and so on. It’s a big challenge. We’re all going to hold our breath, I think, and wait for Glasgow.

Janet Bush: When you look at all that we’ve discussed—the fact that the vaccine hasn’t gone to poorer countries yet, the fact that our supply chains are looking fragile and that might last, and, possibly more difficult than anything, looking at extreme weather events and that huge cloud on our horizon—can you think of a silver lining to this pandemic? One you’ve alluded to is that people are rethinking the way they live their lives. I think that is very welcome. But are there others in more hard-nosed economic terms that you would point to?

Michael Spence: This is one we talked about briefly before, so I’ll just mention it: the digital revolution. And some other stuff: a biomedical revolution, a breakthrough in the sense of technology, in the energy transition.

All of these things (a) are exciting and (b) could create, in the short, medium, and long run, higher growth, higher prosperity, actually more inclusive growth patterns, at least in some dimensions. We all live in a developed economy, so we have offline and online options. But in lots of places in the world, the growth engines bring them up in the direction of income levels that we’re used to, or even high-middle income levels, as in China and a number of other countries.

The offline options are extremely limited. Healthcare, education, access to libraries. All of this has been known ever since we started the digital revolution or got the internet and the World Wide Web. Now, assuming that it can be spread globally, I think the inclusive growth patterns are pretty exciting. Whether it’s e-commerce or the delivery of healthcare remotely, primary care particularly, and so on.

If we can see past the immediate future—the thing that made me pessimistic recently is how much diminished the immediate two-year, three-year time horizon growth patterns look because of these headwinds that you just mentioned. Climate change, clogged supply chains, vaccine problems in an extended pandemic, and so on.

And the one thing we haven’t talked about—we have to deal with this issue of inflation. I don’t think there’s any question that we’ve already had price rises, partly because of clogged-up supply chains and a bunch of other stuff. But the significant question that’s being debated is whether that will embed higher inflation and inflationary expectations into these economies. I think that one’s unsettled. And there is a wide range of opinion on that. But if we do get significant inflation and it looks persistent, then the major central banks are going to have to clamp down on it. And that’s another headwind, at least in the short to medium term.

Janet Bush: In MGI’s recent study on productivity, we said, “Yes, there’s a productivity potential from digitization and all the technological change, but there’s also structural problems with demand.” So if you have a situation where you have—beyond this big burst of demand that we’ve been seeing—the bounce after the pandemic, could you have inflation and weak demand, which is the disaster that we all want to avoid?

Michael Spence: It’s less likely, I think, that we would have both—that is, that we’d have an inflation engine running that was separated from demand/supply imbalances.

Janet Bush: Interesting. Mike, I’ve kept you long enough. Thank you so much for talking to us. We’ve covered a very broad range of topics, but that’s the kind of economist you are. So thank you very much. And we’re very, very grateful.

Michael Spence: Thank you, Janet. It was a great pleasure and I enjoyed it thoroughly.

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