Cybersecurity Impacts on the Global Economy

This episode has been automatically transcribed by AI, please excuse any typos or grammatical errors. 

Steve King 00:13
Good day everyone. I’m Steve King, the managing director of CyberTheory. Today’s episode is going to focus on cyber security’s impact on the global economy and international trade. Joining me today is Kadee Russ, a tenured professor at the University of California, Davis and the co-organizer of the International Trade and Macroeconomics Working Group with the National Bureau of Economic Research in Cambridge, Massachusetts. She is also on the academic advisory board and a visiting scholar at the Federal Reserve Bank of San Francisco, and is also a contributing member at the Institute for Globalization and Monetary Policy at the Reserve Bank of Dallas. She’s received dozens of awards, written hundreds of policy papers, reviews, chapters, journal articles, presented all over the world, and has been the session chair and organizer and panelist at scores of industry conferences. She earned her Master’s and PhD in Economics at the Johns Hopkins University, a master’s degree in Agricultural and Applied Economics and a Bachelor’s in Economics from the College of William and Mary. I think it’s fair to say that Kadee knows a little bit about economics, trade and international policy. So welcome, Kadee. I’m glad you could join me today.

Kadee Russ 01:32
Hi, Steve. Thanks for having me. It’s a pleasure.

Steve King 01:35
So in my opinion, there’s a strong correlation between what happens in cybersecurity and the resulting impacts on the global economy and on international trade. The three major countries who operate most heavily in this arena, Russia, China, and the U.S. all have differing agendas and value systems. What’s your assessment of the current state of affairs purely from an economists point of view?

Kadee Russ 02:03
I think this is a really pivotal time for the global economy in that after World War II, the U.S. really did a lot to create some rules of the road for global trade and finance. And that, according to some people, for instance, Lee Kuan Yew, former leader of Singapore, who helped design and oversee a lot of their miraculous success. So he argued that these rules of the road and this kind of peace, however you want to view it, from U.S. influence and U.S. military hegemony, that that created space for developing countries to really devote themselves to pulling themselves out of poverty. And as developing countries grew, a lot of them were dependent on what we call now industrial policy. So really pumping resources into capital intensive industries, keeping wages low, for some trying to leverage the competitive forces of competing and global markets. And that worked for a long time. And we actually did see some miracles. So we saw many, many people pulled out of poverty under these economic growth models. But then we came to a point in say, the late 70s, early 80s, especially in the 90s, where some of these countries who had pulled themselves out of poverty, or were in the midst of it, they got big. So if we think of the size of China’s economy, for instance, right now, it’s the size of the US economy, in real terms, purchasing power parity adjusted. And so if countries are still pursuing those industrial policies that they use to expand targeted sectors or support them, then that can actually cause distortions in global markets. So again, if we take the example of China, they produce half the world’s steel. And so if they provide supports to their steel sector, that’s going to have an influence on how many steel jobs can be supported by demand in other countries. But then they still have these supports, this industrial policy, and we have this issue of “Okay, how are we going to deal with that?” You know, and that’s coming out in the form of really rapidly escalating trade frictions. I think we saw that over the last four years. And so some people’s answer to that has been to decouple from some of the larger developing economies in particular China. And then on the other hand, you mentioned Russia, we’ve got Russia, and Russia has seen, you know, a real shift since the 90s. And it’s kind of footprint on geopolitics. And so it’s trying to figure out a way “Okay, how am I going to – how are we going to have a place at the table like how are we going to kind of recover our position as a global superpower?” And so you see a lot of disruptive behavior coming from Russia with the cyberattacks, for instance, that we see recently – not that those aren’t necessarily state supported – but to the degree that they’re happening on Russian soil or with groups affiliated with Russia than that, you know, that’s certainly having an impact and getting some attention in the lead up to big events like the G7 Summit that we just saw.

Steve King 05:25
Yeah, you know, everybody’s headed toward digitalization here and growth and production and use of data across broad areas of industry and services is at the core of the digital economy. Emerging technologies like AI are transforming international trade, highlighting the economic, social and political stakes as well as the potential cybersecurity risks. Looking ahead, the deployment of 5G networks and technologies will lead to a step change in the growth of the digital economy and digital trade. What do you see is the future impact of those technologies on trade?

Kadee Russ 06:03
Oh, I think you’re absolutely right. So these technologies are going to broaden the range of services that can be provided remotely and cheaply, even overseas. So I mean, people are talking about surgeries provided remotely overseas, across national borders, across oceans. There’s a wonderful book by Richard Baldwin, who’s part of dynasty in the field of economics, and in particular, international economics. But he has this book called the Globotics Upheaval, and it speaks in detail about exactly this issue. And he says that it won’t be long before a lot of white collar workers whose jobs have been relatively insulated from import competition as compared to the jobs that were displaced during say that the China shock in the 1990s and early 2000s, that those jobs will also be facing a lot more global competition in the coming years.

Steve King 07:00
Yeah, and of course, in the meantime, we’re all you know, threatening and duking it out with each other to create all this chaos in the middle. It’ll be interesting to see how all this evolves. In the realm of economics, globalization tends to refer to a growing interdependence among countries yet flow of goods services, capital technology. Now, at first glance, the case for globalization seems to be just a more general version of the case for freer trade. China has been rolling out its global dependency program, which they call the Belt and Road Initiative to small countries around the world. To get folks to participate in these things, they have offers of cash and advanced technologies, which they exchange for natural resources and also a place in the Chinese Communist Party’s community. What’s your opinion on whether this program will affect international trade and or how the West is going to deal with a much enlarged Chinese economy?

Kadee Russ 08:02
First, I’d like to just emphasize an insight in what you just said that’s very important. So you said that China’s been emphasizing natural resources. And it’s true China has priorities for its foreign direct investment activities. And those are: resource extraction, acquisition of technology, and market access. So you can see all of these at work in one way or another. And the Belt and Road Initiatives across a broad array of regions, whether we’re talking about Southeast Asia or the coast of Africa. You see some of these these things at work. And for market access, I mean, Belt and Road Initiative, it ends in Frankfurt. So we think of it as going through the Silk Road, but it ends in Europe, not just Europe, generally, but Frankfurt. And so you already see a solidification of these ties of this sort of deepening of these interdependencies, mutual commitments. And the G7 discussions last week, when you saw some, some hesitance among some of the European powers to really kind of throw in their fate with the United States and taking up a more confrontational tone with China. There was some hesitancy about doing that. I think in terms of you know, what this is going to do to international trade. I mean, certainly, it’s solidifying some of these ties between China and Europe, it will increase China’s economic footprint across Asia. And I think we have to think about what that means. What does it mean when China has a bigger economic footprint? And so far, it looks like China’s rules of the road have been non market activity, national champions. And we’re not sure how their rules of the road are going to relate to standards. So I’m sure you’ve heard in the news periodically about different issues China might have related to privacy related to forced acquisition of technology as a prerequisite for operating inside China or having access to the Chinese market. And then also issues occasionally with food safety or things like that. So we don’t know how China’s really gonna land on all of these things yet. And so it’ll be interesting to see where they do land, and then how that affects standards throughout this region, where they’re undertaking this Belton road initiative.

Steve King 10:40
Yeah, that’s a very diplomatic answer. I spent six years in and out of mainland China, I have a very strong firsthand idea about what China’s intentions are. And I don’t think that cyberattacks in the last, what, six months now I guess, are by accident, either from China or from Russia, I think those are clear demonstrations of technological superiority, which are essentially threats, right? It’s kind of like, in addition to all this other stuff, oh, by the way, we’re way ahead of you guys in cybersecurity. So if you know what’s good for you, you need to treat these two countries differently. However, so from my point of view, cybersecurity is a global threat, right to the current balance of power. What’s your view of its potential short and long term impacts, I know you’re not a cybersecurity expert, by any means, but you certainly with an observational point of view on international trade and global economy have some view of what’s going on in terms of that threat.

Kadee Russ 11:47
So I spent 18 months in service during the Obama administration, I was senior economist for international trade and finance for the White House Council of Economic Advisers in 2015, and 2016. And so having seen some of these processes in international economic relations, and just as a broad observer, of the national security community, what’s really catching my attention right now, is the mass exodus that we’ve seen of cybersecurity officials from the US government over the last few years. So not only is cybersecurity of enormous importance to national security, as you’re saying, but in terms of who’s, you know, superior or not in cybersecurity. I mean, we are really on the backfoot right now, with the departure of these officials, and they’ve departed from different agencies. So you’ve got from Department of Homeland Security from the State Department from inside the white house itself. So, I mean, we’re really on the backfoot right now. And that is something that must be addressed immediately. I’m sure it probably is being addressed right now. But it could take years to rebuild that expertise in cybersecurity, that would be necessary to really run a whole of government operation to take this seriously. I hope that happens.

Steve King 13:19
Will you agree that we need a whole of government program here to sort of take control of this issue at some central level?

Kadee Russ 13:27
Absolutely. I mean if we can’t even keep our internal US government deliberations confidential. Certainly, it’s gonna be …

Steve King 13:38
Yeah, you’re spot on. So there are four areas of cyber risk that I think have implications for global data flows in this digital economy. National Defense is one. And that includes the defense infrastructure, the networks, software, and all the classified stuff. Critical infrastructure is the second trade secrets and intellectual property are the third, and many would argue that this whole world of mis- and mal- and disinformation is the fourth with a very acute risk to our social fabric. From your perspective, what do we need to do better in our protection against digital disruption?

Kadee Russ 14:20
By paying attention to re-staffing our cybersecurity expertise across the US government that would enable a whole of government approach to cybersecurity and national defense. But it would also enable the US government to be in a better position to perhaps conduct public private partnerships where the government might be able to help support firms in the private sector troubleshoot, kind of like we do stress testing for banks. We could do that for cybersecurity as well more systematically. There was a great article in CNN recently on Estonia and how Estonia has this, not just whole of government approach, but whole of society approach. So they invite school kids to try to hack systems. Just it wants to help troubleshoot those systems, but also to engender people of all ages to maintain these principles of cybersecurity in mind, because cybersecurity isn’t just about the systems, it’s about the people who use the systems. And we don’t really have that culture right now in the US of maintaining a really strong sense of cyber awareness.

Steve King 15:33
Yeah, that’s right. I did see that piece on Estonia. Good on them. You know, what you said is very true. We’re terrible, absolutely terrible at that. But we’re sure good at tying ourselves up in technology advancement at a level of complexity that none of us seem to be able to deal with here. So we are in the glassiest of glass houses here and yet the absolute worst ability to defend against incoming so it’s a real dilemma and to your point, I mean, if we don’t do something really fast, really soon, which the government’s not good at doing, you know, either one, with the exception of maybe the Manhattan Project, or the moonshot, it’s going to get even more exciting here. I think the estimates are like 85 to 90% of critical infrastructure in the US is privately owned. And so the targeting of private businesses is another major cybersecurity risk. We don’t have any incentives for business to invest in the level of protection that would safeguard the public interest. Business is always about business. They don’t care about, you know, issues around society or public defense, the cybersecurity vulnerabilities and all of these networks can become everybody’s vulnerability and kind of creates this prisoner’s dilemma that justifies business under investment in cybersecurity. As an economist, do you think there will ever come a time when boards will move to make significant investments in cybersecurity defense? And and if you do, when do you expect that might happen?

Kadee Russ 17:06
I think of this a little bit like climate change, like you see cybersecurity risks increasing. For instance, we’ve had more than 20 attacks just by either Russian-speaking or Russian affiliated groups in the last year, but more than half of them have been in the last six months. So even in the short term, it seems to be intensifying. So I think this is kind of like a continued heating up that we’ll see in cybersecurity risk, but with periodic extreme events that occur with increasing frequency. And you see that there’s more of a call now for companies to come up with approaches to climate change addressing climate change in their business models. And I think that there will probably be similar calls for cybersecurity. Again, we don’t have the same organization of staffing and expertise in the US government right now. I mean, we have a lot of expertise, but just the leadership is a bit fragmented across the US government. But I’m sure that once that is rebuilt, that we will probably see greater calls and more systematic and supported calls for the private sector to start taking notice. I think you’ll really see action if say, you get calls from like leadership in the Federal Reserve, the Federal Reserve Board of Governors, calling on businesses to start thinking more about cybersecurity and cyber risk. What I wonder is when we’ll see state and local governments taking cybersecurity seriously as well. And that seems very important also for protecting critical infrastructure.

Steve King 18:50
Yeah, no kidding. I got one more question and into your crystal ball, having nothing to do with cybersecurity. When’s the Fed going to get a handle on inflation? And what what is your prediction for what they’re going to do about it?

Kadee Russ 19:07
Oh, my goodness, you’re really asking me to read the tea leaves here. So far, if we look at the rate of inflation on a two year basis, as opposed to a one year basis, we don’t see a lot of heating up of inflation. So what do I mean by that? Well, during the pandemic, we saw prices drop overall. So there’s a big decline in prices. Suddenly, if prices are normalizing or even overshooting a little bit, it over emphasizes the true degree and the increase in the price level. If we’re comparing the price level to when it had just dropped a lot, then of course, it’s going to look like there’s a lot of inflation. Whereas if you look back to where prices were two years ago, you don’t see that bell ringing level of inflation. So certain government officials have predicted that inflation may get to three even toward 4%, before our current boom reaches its peak and starts to subside. I mean it doesn’t seem strange that we would see inflation of perhaps 3% during this boom with all of the rescue funds we have injected into the economy to heal up the job market and try to bring relief to the millions of families who have been displaced or are facing the danger of losing their homes and so forth, have been facing more food insecurity, all of these things. So, you know, it may not be strange to run the economy a little bit hotter for a little while, while we get everyone back up to a better standard of living after this huge shock that we’ve had. But I don’t expect the hyperinflation that alarmists have been talking about so far. I mean they also talked about this, you had people writing op eds in the Wall Street Journal, and elsewhere about the danger of hyperinflation when we had the American do the ARRA, so the rescue from the Great Recession. And that never materialized. Quite the contrary, we seem to be in this era of some very low inflation rates, it’s been all central banks can do to even get anywhere near 2%, which is their normal target. So I think the danger of hyperinflation is really greatly overstated at this point.

Steve King 21:25
Yeah. So your argument would be that the metrics are denormalized right now and that Jerome’s doing what you would do if you were in his position. I take it.

Kadee Russ 21:37
J Powell is doing a fantastic job. He’s doing a fantastic job.

Steve King 21:42
All right. Well, I feel so much better about that. And I promise I won’t ask you to tell us what’s gonna happen in in the housing market.

Kadee Russ 21:50
Yeah, I’d rather not go there.

Steve King 21:54
Of course not Well, listen, Kadee, this was great. Thank you for that all of that insight. It’s really terrific to get a non practitioner’s sort of sober objective insight into the effect of cyber risk on on the global economy. So thank you for that. And I’m going to pull you back here in about four or five months so that we can see what kind of a toll the summer took and if you don’t mind, and we’ll do it again.

Kadee Russ 22:24
Oh, thanks to you, Steve. Yeah, it’s been great. And I look forward to it.

Steve King 22:28
Terrific. Thank you. And thank you to our listeners for joining us on another episode of CyberTheory’s, exploration into the complex world of the complex world. Until next time, I’m your host, Steve King, signing out.