JULY 2019

Takeaways from the Aspen Ideas Festival: Next New World Order and Economic Progress, Part II

Category: Managing Directors, Portfolio Management

By Doug Cohen, Managing Director, Portfolio Management

The following are my key observations from the speakers of the remaining sessions that I attended on the broad themes of the Next New World Order and Economic Progress. Please also see from this topic Part I can be read here and Part III can be read here.

Takeaways from sessions I attended on the theme of American Renewal can be read here.

Where the West Lost Its Way

John JudisJournalist and author of eight books, most recently The Nationalist Revival: Trade, Immigration and the Revolt against Globalization

Kori SchakeDeputy director-general of the International Institute for Strategic Studies, formerly of the National Security Council staff, the State Department Policy Planning staff, and Pentagon staff

Douglas Lute—Retired US Army lieutenant general after 35 years, former US ambassador to NATO, National Security Council under both Obama, and president of Cambridge Global Advisors

1) The session focused on the 30 years since the Berlin Wall fell and the Tiananmen Square uprising and the sense at the time that the Western model of liberal democracy had triumphed over other, mostly authoritarian models. The panel’s consensus was that the West ultimately misjudged the nature of Russia and China (in particular), while exhibiting a certain amount of hubris in the 2000’s, particularly via the Iraq War. Still, as Judis highlighted, there were many severe miscalculations over the past 30 years, including the notion that Europe’s embrace of the Euro would usher in a new age of economic and political harmony on the continent, that financial deregulation would enhance prosperity, that a stronger NATO would not ruffle Russia and that China would play by the rules as part of the World Trade Organization. The reality is that economic tensions have persisted, and nationalism and populism have enjoyed a resurgence in recent years as evidenced by President Trump, Brexit and several European countries including Hungary, Poland and the Czech Republic.

2) Schake offered a more nuanced assessment of the above points, including the notion that there are multiple counterfactuals, including what would have happened to countries such as Poland had the US not defended them after the end of the Cold War. She also highlighted the poor execution/incompetent planning under both Bush and Obama that made the Iraq War more difficult than it could have been. Schake acknowledged that, in hindsight, the US should have done more to support the establishment of democratic institutions in Russia once the FSU broke apart.

3) Regarding China, the Blair/Clinton led decision to admit China to the WTO was highlighted as a major miscalculation in the sense that the Chinese were not allowed to play by the prevailing rules under the assumption that they would eventually come around. A better understanding of Chinese history could have avoided this major miscalculation. Instead, some countries such as Japan, India and Australia are banding together to thwart the impact of China’s Belt and Road initiative. Luke noted that the US decision to walk away from the Trans Pacific Partnership agreement was likely a major mistake that has impeded our ability to compete effectively with China over time. While the consensus appeared to be that there a go-it-alone strategy was not likely to work for the US, Schake was still open to the notion that Trump’s trade-related tactics may pay off over time. She also noted that looking 30 years ahead, the development of increasingly strong economies in Hong Kong and Taiwan would be the best way to cause China to re-visit its own model.

--A key question that was not addressed: “To the extent Trump has argued for an “America first” approach—and that he expects all countries to take a similar approach based on self-interest—is such an approach truly any different than the prevailing global political mentality in 1989, the decades before or the decades since?”

The Internet Era: How Connectivity is Reshaping the World

David KilpatrickFounder and editor in chief of Techonomy Media and author of the best-selling book, The Facebook Effect: The Inside Story of the Company that is Connecting the World

Ramesh SrinivasanInformation Studies and Design|Media Arts at UCLA, founder of UCLA’s Digital Cultures Lab, and author of Whose Global Village? Rethinking How Technology Impacts our World

1) This session featured roughly ten different speakers. We have highlighted two speakers that addressed one of the more common themes at the conference—whether the internet and social media have matured in occasionally destructive ways. Along those lines, Kilpatrick drew upon his Facebook themed best-seller to emphasize that the company has almost unprecedented power with minimal regulatory oversight. He argued that the core of the problem is that the advertising model rewards time spent on-line. Therefore, Facebook has prioritized inflaming the fear and anger emotions that tend to cause people to stay engaged on the site. Issues such as electoral interference and addiction have not been adequately studied or addressed. Authoritarian leaders have learned how to use the site to their advantage, including using content that can be easily manipulated. He faults Facebook for allowing groups such as anti-vaccine advocates to spread disinformation. He believes the company’s operating margins—among the highest of any public company—should be sacrificed in part to build additional safeguards. He also argued that the riches amassed by the company’s founders and largest investors have blinded them to the negative impact of the company even though almost no one outside of the company has come to their defense.

2) Srinivasan offered a similarly downbeat assessment of the internet giants. He emphasized the extent to which the leading tech companies have exacerbated inequality throughout society, including the extent to which their often asset-lite models result in limited staffing levels. Partially as a result, the percentage of children who can expect to earn more than their parents has plummeted in recent years. Supposed breakthroughs such as Face Identification aided by AI falsely indicated that 28 members of Congress were suspected criminals, with particularly high rates of misidentification for people of people of color. To the extent that AI programmers are often men, their output often favors men in areas such as hiring recommendations. His recommendations included consideration of the basic income proposal championed by Democratic presidential hopeful Andrew Yang and so-called data dividend programs that would provide renumeration to those whose personal data is being utilized.

3) We note that Facebook’s Mark Zuckerberg scheduled an appearance at the Festival on short notice for just after our departure. He addressed some of these criticisms in remarks, including a call for additional privacy legislation and objections to proposals to break up the company in remarks that were well-covered by the press. Click here for Zuckerberg's comments.

--A key question that was not addressed: “Are companies such as Facebook, where the vast majority of employees reportedly lean toward the political left, consciously or unconsciously biased against conservatives?”

Capitalists, Arise!

Peter GeorgescuChairman emeritus of Young & Rubicam. Originally from Romania, he and his brother were imprisoned in a work camp there for eight years after the Iron Curtain fell, forcing their parents to stay in the US where they were on a business trip. The family was reunited in 1954.

1) After recounting his remarkable life story summarized above, Georgescu emphasized a familiar theme at the Ideas Festival—that capitalism is still the best economic system in the world but that it has remained too closely connected with the Milton Friedman-inspired notion of shareholder value/profits rather than stakeholder value. To the extent labor is the highest cost on most P&L’s, it is the natural first target for CEOs. This helps to explain why real wages have been essentially flat for the last forty years, as well as the general reduction in R&D levels over the same timeframe.

2) Georgescu argued that the current economic path is unsustainable as rising inequality will inevitably lead to a political backlash that could threaten the capitalist system. Conventional GDP and unemployment figures do not come close to correctly measuring the degree of suffering in society given measures such as the low labor participation rate, declining educational statistics relative to the rest of the developed world and the rising gulf in life expectancies between the rich and the poor.

3) Georgescu stated that he is an optimist by nature and believes there are solutions that emphasize inclusiveness— “we won’t get equality of income, but we want equality of opportunity.” He believes that government is unlikely to solve the problem—"they don’t have the money and when they try and fix serious problems they do it badly! The private sector needs to lead.” It starts with CEO’s and Boards being increasingly willing to invest in people and R&D and taking a customer-oriented approach as opposed to one dominated by shareholder primacy. In his view, such changes need to occur within the next 18 months (presumably before the 2020 election) to help avoid a disruptive revolution.

--A key question that was not addressed: “To what extent can flat real wages and other elements of domestic stagnation over the past 40 years be attributed to globalization (e.g., lower manufacturing costs in Asia) as opposed to a presumed over- emphasis on maximizing shareholder value?”

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