Read the full transcript of Niall Ferguson’s talk titled “What DOGE Is Trying To Fix And Why It Matters” at ARC Conference [Feb 21, 2025].
Listen to the audio version here:
TRANSCRIPT:
Introduction
NIALL FERGUSON: Good afternoon. I’m a little disappointed. I thought the deal was that I was going to plug Whole Foods and John Mackey was going to plug one of my books. And my line was that I am to economic history what Whole Foods is to groceries, but I’ve scrapped it since he didn’t stick to his side of the deal.
You know, why don’t we do what John just recommended? Capitalism with love. Why don’t we all just do that? Why isn’t the world already like that if it’s so evidently true? I’m going to talk about some of the political and cultural constraints on that possibility of capitalism with love.
The Global Strategic Challenges
I don’t know if any of you were in Munich over the weekend. Security Conference was some version of Sam Huntington’s Clash of Civilizations. This is J.D. Vance. He borrowed my line. I had said, we are the Soviets. And he said to the Europeans, no, you are the Soviets. And this was the audience reaction.
You know, I kind of sympathize with much that J.D. said in that speech on censorship and the way in which European and British governments have increasingly engaged in it, the dangers of driving certain political opinions out of the legitimate political system. But I was left by the Munich Security Conference with an uneasy feeling that neither Americans nor Europeans have convincing answers to the strategic challenges we face.
There is an axis that has formed in the last four years, an axis of authoritarians, if you like, of ill will, as I once said.
This axis has four members. I nearly forgot Little Rocket Man. And while it’s sometimes hard to take him seriously, when you think of the armed might that these four authoritarian powers can bring to bear, it’s a truly daunting force. Bigger in economic terms, and certainly in terms of firepower, than the Axis powers of the late 1930s on the eve of World War II.
So we can have arguments about what’s sometimes called the culture war. But I worry about the actual war, the Cold War that’s been going on now since at least 2012 between the United States and its allies, and China and its allies, but also about the potential World War III that I believe is much closer than most of us sitting here want to admit.
In some measure, you can see the beginnings of that war already in Eastern Europe, where war has been raging for nearly three years in Ukraine. In the Middle East, where Israel has been fighting on multiple fronts against all the different tentacles that extend out from the Islamic Republic in Tehran.
I want to tell you about Ferguson’s Law. This is not an eager trip because it’s named after Adam Ferguson, the great Enlightenment thinker. I just want to point out to all of you, if you didn’t already know this, all the good ideas necessary for a successful and flourishing civilization were had in the Scottish Enlightenment in the late 18th century. All of them. All the ideas that came later were worse.
But Adam Ferguson doesn’t get as much airtime as Adam Smith or David Hume or some of the other great thinkers. But Adam Ferguson, in his great essay on civil society, written in 1767, was the first thinker to appreciate the risks of public debt, the dangers of excessive public debt. And I’ve tried to simplify Adam Ferguson’s thinking into a law.
And the law states that any great power that spends more on interest payments on its debt than on defense will not be great for long. Guess what? The United States broke Ferguson’s Law for the first time since 1934, last year. It’s the first year in my lifetime that the United States has spent more on interest payments on the federal debt than on defense.
What’s worse is that the United States is on a very bad path indeed. If you look at data that the Congressional Budget Office publishes annually, long-term projections of United States economic performance, of government spending, of government revenues, of government borrowing, a very disturbing picture emerges, which I’ve put on this chart.
Over time, starting last year, the United States is on track to spend more and more on interest payments and less and less on national security, until by 2049 it will be spending two times as much on interest payments as it spends on defense. And its defense budget relative to gross domestic product will be roughly where the European defense budgets are today.
The problem with this is that it sends a signal of weakness. A signal of weakness that you can be sure is picked up in Beijing, in Moscow, in Tehran, in Pyongyang.
Historical Context of Ferguson’s Law
The powerful thing about Ferguson’s law is that it applies to every great power going all the way back to the Venetian Empire. The great empire run out of Castile that we think of as the Spanish Empire succumbed to Ferguson’s law in the 17th century. The Dutch Republic succumbed to it in the 18th.
The reason that France succumbed to revolution at the end of the 18th century was the violation of Ferguson’s law decade after decade, until the reign of Louis XVI ended in catastrophe. Ferguson’s law also explains the American Revolution. It was the fact that the British crown was violating Ferguson’s law that led it to make tax demands on the American colonists that finally drove them to revolution.
In the 19th century, Britain consistently abided by Ferguson’s law, spending more and more on defence relative to interest payments, until by the eve of World War One, its defence budget dwarfed the interest on the national debt. It was in the 1920s and 1930s that debt service exceeded defence, and of course that was the time that Britain failed to deter Germany from making its bid for world power in 1939.
Appeasement, the policy that we’ve come to despise, was in many ways rooted in British government’s inability to abide by Ferguson’s law in the interwar period. It should concern us all very deeply that the United States now finds itself in a fiscal predicament highly reminiscent of that of Great Britain between the World Wars.
The Global Fiscal Crisis
If you apply this same measure to all of the most advanced economies, the group of seven countries, you’ll see that they’re all in violation of Ferguson’s law except Germany, which of course imposed on itself a constitutional debt break, a very blunt instrument to prevent the government from borrowing except in emergencies.
The fiscal imbalances are chronic in five out of the seven G7 countries. If you look at the net debt to GDP ratios, these are IMF data, you’ll see a significant number close to or above the 100% of GDP threshold that most economists think of as being the threshold of sustainability. You’ll see that they are all, with just a couple of exceptions, running in defensibly large deficits relative to GDP.
It is a stunning indictment of the fiscal policy of the Biden-Harris administration that the federal deficit at the end of their term was 6% of gross domestic product at a time of full employment. This is the essence of fiscal unsustainability.
Four Root Causes
What are the deeper causes of this obviously grave problem? I want to offer in the final four minutes that I have four answers to that question.
The first is demographic decline. An economy cannot achieve strong and sustained growth when its total fertility rate, the number of children or babies per woman, falls below the replacement rate of 2.1. Every single G7 country is now well below the replacement rate. That has two obvious consequences. One is the ageing of the population, which sends welfare states designed for higher fertility and shorter lives inexorably towards bankruptcy. Secondly, it leads to a craving for immigrants by a labour market that is short of young people. And that sucking into our economies has of course become the great political flashpoint of our time, as JD Vance pointed out in Munich just hours after yet another hideous terrorist attack on innocent civilians by a radicalised Muslim immigrant.
Two, the productivity plateau. When you look at productivity growth in advanced economies, it is very notable that some of them have hit a plateau and one of them is the United Kingdom. You can see in this chart that United Kingdom productivity has almost flatlined and is substantially below that achieved in the most highly productive economies in the G7, that is to say the United States, France and Germany. This is a measure of GDP per hour worked.
The third reason, one that is very dear to my heart, is educational degeneration. I’m delighted to say that some students from the new University of Austin are here along with our President, Pana Kanelos. Wonderful, wonderful, brave young people. Young people willing to bet their first degree on a new institution that has said it is going to remake higher education, challenging the sclerotic systems with their ideological blinkers that we see all across the English-speaking world.
But the educational degeneration runs deep. These are the PISA scores for 15-year-olds in the G7 countries going back to 2003. Those mathematics scores have either declined or flatlined. They’re notably behind the scores in mathematics for these predominantly Chinese cities.
Cultural Unmooring
There’s one more thing I want to draw your attention to. The cultural unmooring of the Western world, of the English-speaking world and of Protestant Europe, is one of the most striking and understudied phenomena of modern times. And you can capture it neatly with these two cultural maps from the World Value Survey.
What you can see is the way in which Protestant Europe and the English-speaking world have, since 1981, moved away from the rest of the world’s cultures, moved ever further along the x-axis of self-expression versus survival, ever further along the y-axis of secular values against traditional ones.
Although I’m an economic historian, I often think that economics, as well as politics, are downstream of culture. This cultural unmooring may be the most profound reason why we are not all thriving in the kind of world of capitalism with love you heard from from our previous speaker.
This is Thomas Cole’s great cycle of paintings, the life cycle of empire. I leave you to guess at which stage we find ourselves today. Thank you all very much indeed.
