Capitalisn’t: America’s Addiction to Easy Money

Ruchir Sharma: The reason you have the opioid crisis, many people argue, is because of this culture where, at the slightest hint of any pain, you administer people drugs and medicine, Oxycontin or whatever. That same societal approach has now come to be, as far as economic policymaking is concerned, that at the slightest hint of any pain, you just administer stimulus or have government intervention to try and deal with the symptoms, and you may be making the underlying cause of the problem even worse.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Bethany: Our podcast is dedicated to discussing what’s working in capitalism and what isn’t. So, we could not pass up the opportunity to discuss a new book titled What Went Wrong with Capitalism, especially when the author, Ruchir Sharma, is a well-known FT commentator; has written a New York Times bestseller, The Rise and Fall of Nations; and has worked at Morgan Stanley for 25 years as the head of emerging markets.

Luigi: Most importantly, Bethany could not resist the fact that the book blames the Fed for all the problems of capitalism, from low productivity to inequality, from excessive concentration to slow productivity. There is no problem that easy money has not created and no problem that tight money cannot cure.

Bethany: Oh, come on, Luigi. That’s not quite fair. Anyway, I’d actually argue that the Fed is just an enabler of the bigger problem, which is our addiction to government bailouts and more and more debt.

One of the first episodes Luigi and I did together was on modern monetary theory: the idea that debt doesn’t matter. Without ever having officially embraced MMT, the United States, in many ways, has. Sharma’s somewhat heretical idea is that debt, indeed, does matter.

And, Luigi, I also thought about you when I read this line in Sharma’s book because it sums up your work with ProMarket.org in many ways: “Probusiness is not the same as procapitalism, and the distinction continues to elude us.”

Luigi: Indeed. As our loyal listeners will remember, we touched upon the Fed’s effects on inequality with Karen Shaw Petrou in one of the early episodes in April 2021.

Yet this book is much broader in its attack on the Fed. It criticizes the Fed’s policy to help banks in crisis starting with Continental Illinois in 1984. It criticizes Bernanke’s antideflationary policy in the early 2000s. It criticizes Powell’s massive quantitative easing introduced post-COVID.

Bethany: Sharma claims that easy money has facilitated the survival of inefficient zombie firms, reducing productivity growth. It has also exacerbated inequality, much as Karen Shaw Petrou has argued. The wealthy tend to gain more in booms and lose more in a real recession. As a result, the Fed’s policy to bail firms out during recessions has benefited the wealthy more.

Finally, building on an argument of Luigi’s colleague, Amir Sufi, easy money has made it easier for large firms to borrow, increasing their market power.

Luigi: The prevailing narrative is that the post-World War II nirvana of high GDP growth, high productivity growth, and broad increases in per-capita income was destroyed by the evil neoliberal revolution led by Thatcher and Reagan. After this revolution, the narrative goes, the government was starved for resources, welfare was cut, and regulation was neutered.

Ruchir says that is all wrong. The US government did not shrink after Reagan, nor did welfare payments. Government regulators increased in number and importance. The only difference is that taxpayers were not asked to foot the bill right away, and an increased share of the expenses was paid with debt.

Bethany: The book is also quite critical vis-à-vis regulation, which it blames for the slowdown in productivity growth. Sharma points out that, actually, almost every president has added to the number of rules on the book. Indeed, there’s a lot that’s very surprising about this book.

Let’s go back not quite to the beginning. One of the things I really like about your book is the deep recounting of history. But let’s go back to the Depression. It seems to me that you argue that we, in some ways, took the wrong lesson from the Depression, if the conventional view is that we should just spend more and spend more in order to prevent anything like this.

But you cite the work of the historian Alexander J. Field in describing the Depression as the most intense period of creative destruction in American history. What, in your view, is the lesson of the Great Depression?

Ruchir Sharma: That’s a great question, but I think we have to put this in context here. The Great Depression was seen as a big policy mistake. You had the Roaring ’20s, and then you end up getting this big stock-market crash, which then leads policymakers to say that we need to ignore this. In fact, we need to liquidate, liquidate, which is to allow this to play itself out on its own. And then you end up getting the Great Depression.

But I think that what we forget is, why did policymakers do that? It’s because of the experience of the previous century, including what I term in the book as the forgotten depression of 1920. In 1920, you had a mini-depression. At that point in time, the policymakers again took the approach which they had for all the previous downturns, that downturns are, in fact, pretty good for the economy.

They end up purging the excesses, and they set the stage for the next boom to begin with the healthier and the survival of the fittest. Lo and behold, that depression passed without any policy intervention in 1920. Then, you’ve got the Roaring ’20s, which, as is well documented, was about the best decade the US has ever enjoyed in terms of economic growth.

Now, as that line goes, a strength taken too far becomes a weakness. That is what was done. But then, you believe that is what you should continue to do and do it even more aggressively when the 1929 stock-market crash happened. And so, therefore, you ended up getting the Great Depression.

Subsequently, what’s happened is that every time now there is a stock-market crash or a downturn, or any time there is some fear that we will have a recession, the fearmongering now is that, oh, we’re going to get another Great Depression again if you don’t do anything.

Here we were, where everybody on television was coming on and saying, “Hey, we need to see the Federal Reserve cut interest rates very aggressively just now because otherwise, if they don’t do that, we’ll end up getting a recession.” A one-day stock-market decline and the recession fears come back, and that’s the policy change we have seen of 180 degrees. We have gone from one extreme to a complete other extreme now.

Luigi: I would like to understand, who do you think is the culprit here? There’s no doubt that in the Great Depression, there was too little intervention. Today, there is too much intervention. But who is to blame? Is it the Fed, the politicians, financial firms, all of the above? Nobody? Who is responsible?

Ruchir Sharma: I think that, as that line goes, the road to hell is paved with good intentions. I don’t think that this is all about pinning the blame on someone. It’s just become the response. In fact, in the book, as I argue, there’s an analogy here to pain management.

In America today we have an opioid crisis. The reason you have the opioid crisis, many people argue, is because of this culture where, at the slightest hint of any pain, you administer people drugs and medicine, Oxycontin or whatever. That same societal approach has now come to be, as far as economic policymaking is concerned, that at the slightest hint of any pain, you just administer stimulus or have government intervention to try and deal with the symptoms, and you may be making the underlying cause of the problem even worse.

Today, when I look at most people and their policy solutions, it is just about more government. The government needs to give people greater subsidies to buy homes. The government needs to intervene more to deal with income inequality. The government needs to do more to fight climate change. The government needs to do more to fight industrial policy.

Then, there is this whole impulse that, at the slightest hint of any trouble, the Fed needs to intervene to stabilize markets. It’s just become complete impulse.

Bethany: The Great Financial Crisis of 2008 obviously wasn’t the first time the Fed stepped in to bail things out. Maybe we can go back to Long-Term Capital Management. But we were all there for the Great Financial Crisis. What would you have done differently?

Ruchir Sharma: I think in the Great Financial Crisis, it may have been too late. What they had to do may have been justified.

But there are two things, I think, which were wrong after that. One is that even after the financial crisis was over, they continued to set policy as if the crisis was going on, such as quantitative easing.

It’s one thing to do QE in the middle of a crisis. It’s another thing to do QE for a decade more after that. Just look at the precedent, which is that, right up until the 1970s, the thought of the government bailing out a private-sector company was considered to be heretical, and there were really no bailouts. This culture of bailouts started in 1984, I argue, with the first big bailout of a financial institution w Continental Illinois. Each time, it’s gotten bigger and bigger.

The policy response and the markets almost seem to demand it now. Every time there is a problem, you expect an even bigger and even more preemptive policy response. The turmoil last year in early spring with Silicon Valley Bank . . . Once again, the whole response there was to rush out the cavalry that we need to bail out the bank. We need to make sure that the depositors don’t get hurt.

We implicitly have put in a guarantee now that depositors will never lose money. Once you do it, and then you keep doing it, there is no end to it. Then, if you don’t do it, the reaction will be much greater. The patient’s used to getting pain-management medicine, and if you don’t give it, you are going to get a much bigger freakout until the patient gets used to not having it.

Somebody needs to be talking about this. How do we tell people that the government’s not here to bail out companies again? I think it could even be a populist agenda. I think there are a lot of people in America who believe that these kinds of bailouts are counterproductive, and they do nothing for them, and there’s something very wrong and unjust about it.

I call bailouts the modern form of trickle-down economics. We have to save these companies because if we don’t do it, it leads to mass unemployment; it leads to mass problems in the economy. It’s become the modern form of trickle-down economics.

Luigi: I like your analogy with the opioid crisis, but I have a completely different interpretation of the opioid crisis, and as a result, I have a completely different interpretation of what’s happening in the financial sector.

In the opioid crisis, it is pretty clear, at least to me, that pharmaceutical companies massively marketed opioids claiming they were safe. They paid people to dupe doctors. They knew what they were doing, and they were doing it for money. A lot of doctors and researchers, et cetera, were basically paid for by the various pushers. It started with Purdue Pharma, and you go down to all the other ones.

I think it’s the same in the financial industry. I think that the government reflects the pressure at the political level but also at the public-opinion level. This pressure is concocted very often by the financial industry. By the way, most secretaries of Treasury come from investment banks, and they continue working for investment banks when they are at the Treasury. It’s just a detachment in which they work, and they push this bailout policy because it is in their interest.

You have worked for a long time for one of these investment banks which benefited tremendously, by the way, from the bailout because Morgan Stanley would have gone bust. Why aren’t you more critical about all this ecosystem?

Ruchir Sharma: I’m critical as much as I can be. As I argue in the book, the real problem in America today also is the amazing concentration of power and the rise of oligopolies. The rise of these oligopolies and the concentration of power that you’re alluding to, a lot of this has been caused by this incredible amount of regulation that we have.

As I show in the book, in the last 20 years, there’s been an explosion of new regulations in America. There are 3,000 new regulations which are brought in every year for the last 20 years, and the number of new regulations that’s been withdrawn has been 20 in total. It makes it very difficult for new businesses to start up because the cost of complying with these regulations is incredible.

Twenty years ago, if you were to start your own investment fund, compared to today, the cost has gone up 10 times. You have so much more legal compliance and other things that you have to deal with, administrative costs. It leads to much greater scope for regulatory capture. The top people in Washington, the lobbyists, they all work for some of these very big firms. These days, it’s all the tech firms.

I think that this whole idea where you end up getting people so easily to switch between working in the government, then in the private sector, working in the private sector, and then getting into government, I think there’s something wrong with that nexus as well.

I’m all with you on these facts, but we need to analyze what’s really causing this incredible concentration of power and what are the negative consequences of it: the incredible amount of regulations that people have to deal with.

I have in the book that 16 percent of the time that Americans spend today at work is in dealing with these testimonials and legal-compliance courses. Sixteen percent of your time goes into that. That’s quite a staggering statistic and the dead weight that causes on the economy and the stress it causes for the average person.

Bethany: You have a line in the book that I think sums this up and that I thought would be music to Luigi’s ears, which is, “Probusiness is not the same as procapitalism, and the distinction continues to elude us.” Do you think there are any capitalist companies left in America?

Ruchir Sharma: There are still a lot of strengths, as far as America is concerned. As I argue in the book, capitalism is in worse shape in Europe. It shows up in the productivity numbers, it shows up in the regulatory environment you have in Europe, and the creative destruction that you have in Europe is far less compared to America.

There’s still a lot that I like about this country. But I’m trying to say here that the direction of travel is wrong. Why are so many people disaffected with capitalism? Even though, at the surface, economic growth seems OK, and the overall economy seems OK, why are so many people distressed by it?

Bethany: You also write in one part of the book: “Government for the last four decades has been contributing to the rise of oligopolies in three ways: by abandoning antitrust enforcement, by expanding regulation in just about every other way, and by soaking the capitalist system in debt through easy-money policies.”

Yet in another part of the book, you say, “As destructive as oligopolies can be, even the most powerful need to be contained with a deft touch, not populist vengeance.” On that specific question of antitrust enforcement—which is a big question today, obviously—how aggressive should the government be?

Ruchir Sharma: I think that the big oligopolies have gotten to a point where you need greater antitrust action, but you need a proper structure to do it. In China, we just saw that they’re trying to curb the power of the big firms there, and doing it in an arbitrary political way is leading to a lot of damage.

The second thing that I say here, just doing antitrust may solve the immediate problem, but how do you prevent oligopolies from coming back up again, five to 10 years from now, somewhere else?

Unless you clean up the regulatory act so that regulation becomes procompetition again, rather than the kind of regulation you have today and the overregulation, which is pro-big-business and pro-incumbent, my fear is that, OK, fine, you do antitrust now. But five, 10 years down the line, you’ll have oligopolies somewhere else if you keep going down the regulatory path. It has to be both.

Luigi: We agree on the antitrust issue. And I even agree with you that serious antitrust should be joined by some restructure of regulation. In a book I wrote more than 10 years ago, one of my suggestions was trying to simplify regulation but making it enforced more by liability suits rather than by regulators.

A lot of regulations start very well-intended but end up with the opposite. The simpler the regulation, the more transparent, the more understandable it is, and the more support it can have from the public at large. But also, the easier it is to enforce, and it can be enforced through aggressive litigation.

Ruchir Sharma: Broadly, what you’re saying makes sense to me. I think this is where we are possibly in disagreement with other people who tend to be very free market. They feel the mention of antitrust is antithetical to capitalism and free markets. I think that what we are saying is that the system today has been so distorted that you need some corrective mechanism, and if it’s got to be antitrust, so be it.

But you cannot ignore the fact that these companies are earning supernormal profits, and something needs to be done to check that. With those supernormal profits, they’re just galloping and galloping ahead. They’re able to corner so many of the markets and also engage in practices which are borderline immoral.

Capitalism, unfortunately, has earned such a bad name that it is seen by many people to promote these oligopolies. It’s seen to promote profits and greed and all those adjectives which go along with it. But I think it’s the job of pure capitalists to emphasize that capitalism is about companies’ profits being competed away over time, not companies earning supernormal profits for such a long period of time. Over the last 15 years, these tech companies, in particular, have earned profits like companies have rarely ever done in the history of the world.

Bethany: I actually had a question for both of you. You argue in the book that the growth in government, the gigantic growth in debt, has led to decreases in productivity. You draw on some work by Atif Mian and Amir Sufi, friends of Luigi’s at the University of Chicago, complaining that the years of low rates set by the ECB were helping big hotel chains get bigger, run little guys out of business. Is this idea well understood and accepted in economics? Or is it a contrarian idea?

Ruchir Sharma: I think that their work got a lot of play, as we know, when they first came out with it, but I still feel it’s a relatively contrarian idea. What the ills of easy money have been, over the last couple of decades in particular, I think that point is not that well understood.

At the top, you have concentration of power caused by easy money, and at the lower level, you have so much deadwood which is kept alive. In doing so, you are squeezing out a lot of the big middle. A feeling that has been created is that there’s an inequality of opportunity here for new entrants.

I think one of the very important moments in financial and economic history was the stock-market crash of 1987. For the first time, a Fed chairman actively intervened to prop up the stock market, and that then led to the label of the Greenspan put.

After that, it’s become this asymmetrical reaction, which is that on the downside, you have the central bank saying, “We are here to protect you if something really goes wrong.” On the upside, even if there’s a bubble, they’re saying: “We don’t know how to know if it’s a bubble, so there’s nothing that we are really going to do.” This entire notion that, on the upside, you can capitalize your profits, on the downside, your losses will be socialized, I think is the other distortion that’s been caused.

Luigi: The idea that it is the easy money that created monopolies, I think is still fairly controversial in the literature. The example that you provide in the book, which is a very nice one, where the hotel owner in Spain is saying, “Oh, it’s because of the easy money that all these chains are basically eating my lunch,” I’m not so sure that that’s the reason.

There are many more economies of scale, even in tourism, and as a result, they are eating their lunch because of these economies of scale. This happened at the time of easy money, which may have accelerated a bit what was happening anyway, but it’s not the easy money.

Walmart conquered the United States during a period of not-easy money, but it conquered because it had better logistics and was able to compete very aggressively. The mom-and-pop store may have blamed something else, but that was not the reason. I’m not so sure that that’s the reason for concentration.

Ruchir Sharma: What I’m saying here is that there’s some issue where it’s not concentration happening in one industry, which is fine, it may be OK. It’s concentration happening across industries, and concentration happening in industries which are both domestic and global in nature. If it’s happening across the board, I think there’s something wrong.

Luigi: I don’t know whether it is wrong. There is something that we need to do. I think that one of the things that is across the board is the technology. The other thing is that as we globalize, it is easier to compete at the global scale.

Ruchir Sharma: Evidence I present in the book shows it’s much bigger than that, which is that it’s even coffin makers, the beer industry. These are things where you’re seeing just two or three players increasingly concentrate.

It’s not just about industries which are global or rich in technology. Often the top-most people who are the lobbyists in these industries, or the top donors, they all tend to be from these top businesses.

Luigi: Oh, absolutely. But I think that the reasons there are the acquisitions without antitrust. In fact, with due respect, often the investment bankers come and propose acquisitions where they say, “Oh, there is more resiliency in price,” which is a politically correct way to say market price.

Or “there are unspecified synergies” because they don’t want to say on the record that they’re doing it for market power, but they are going for market power. In that sense, I do agree 100 percent with you on the antitrust role.

Bethany: But from the noneconomist vantage point, you did see this in the pandemic, where you had all sorts of very weak, big firms that, thanks to the Federal Reserve’s largesse, were able to access the capital markets at very low interest rates and bail themselves out.

While, yes, the government did try to help smaller firms through various programs, they didn’t have access to that same largesse. That led to the death of a lot of small companies and the survival of a lot of big companies, which, again, is just an example from a moment in time, but I do think a telling one.

Luigi: One thing that I found very interesting in your book is the fact that the so-called Reagan Revolution not only did not cut the size of the government, which I knew, but did not even cut the size of welfare. For all this blame on Reagan and the turning point, et cetera, very little has happened, except we stopped financing public expenditures with taxes, and we finance them with debt.

Then, we built an enormous level of debt, which will have consequences. As you are, I am an immigrant from Italy, and I feel like I’m living the same story twice in my life. I come from a country that was corrupt, with a large amount of debt, slow growth, and all of a sudden, kids start to live with their families because house prices are too high, and they cannot afford it. As a result, they don’t have kids, which exacerbates the natality problem, et cetera, et cetera.

This is the Italy I left in 1988, and this is the United States I find now in 2024. The debt-to-GDP level is at the level that I left Italy in 1988. The subsequent 30 years have not been great for Italy, as you know. I fear that the subsequent 30 years for the United States might be as bad.

Ruchir Sharma: I think that among many economists now, it’s become a thing that deficits and debt don’t matter because for the last 30 to 40 years, there have been no apparent consequence.

But I think that the points that we want to make here are twofold. One, on the debt and deficits itself, the US was running a debt and deficit level for the last few decades that was pretty much in line with the average of other developed countries, about a 3 percent deficit every year. The debt-to-GDP level also was somewhere in the middle of the pack of other countries.

Under the Biden administration, we have gotten to a level where we seem to be in a permanent deficit of nearly 6 percent of GDP. The debt levels now have risen to a level where the US will surpass Italy as the second-largest indebted developed nation by the end of this decade.

The deeper point I’m trying to make in the book is that it’s not just about debt and deficits, where you can measure the government’s involvement in the economy. It’s the entire suite of habits: the bailout culture, the micromanagement of the business cycle, the propping up of zombie firms, the regulatory environment. It’s the whole suite of habits.

In fact, one of the sections that I related to a lot in the book, and I think many of the readers will, if you were to look at the leading symbol for many people as to what went wrong with the American Dream, and in a way, then, what went wrong with capitalism, it is property prices. The most staggering fact is that the number of new households being created in America today is the same as it was in the 1950s, even though the population has doubled.

There’s a massive shortage of new housing supply in America today, and it’s all got to do with what’s gone broadly wrong with capitalism. The amount of regulatory stuff that you have today makes it so difficult for new homes to be built, whether it’s the zoning laws, the coding laws. It’s also about how the entrenched and the elite work, where the entire system is there to benefit people who already own homes. For anyone new coming into their neighborhood, it’s very difficult. The NIMBY-ism problem has been described out here.

Bethany: You mentioned in the book, but you didn’t mention in what you just said, the role that easy money has played in that, particularly the government’s purchases of mortgage-backed securities through quantitative easing. I just had to toss that in there because that’s a particular bugaboo.

Ruchir Sharma: That’s right. On the demand side, we have seen what easy money has done to prop up asset prices, but on the supply side, what the entire regulatory environment has done to kill the growth of new housing supply in the market.

Bethany: Our listeners should know that the podcast was recorded before the election, but Luigi and I are recording this after the election. We’re going to update some of Sharma’s ideas for the current state of affairs.

Before we get to some of those questions, Luigi, there was an unresolved disagreement in our podcast that I wanted to touch on. Sharma argues that easy money helped to breed monopolies. You say no. It seems to me, although I may be mistaking correlation for causation, that he’s right and that the answer is yes. So, I wanted you to expand a little bit on why you disagree with that notion.

Luigi: There is clearly a correlation between the two, but it’s not necessarily causation. And, yes, my colleague has a paper trying to argue that easy money only favors the largest firms and does not reduce the credit constraints of a lot of smaller players.

But the traditional finance view is that when you decrease interest rates, the people who benefit the most are the ones who can’t access credit at all. When the rate goes down, all of a sudden, they can have access to credit.

If you are Amazon or Apple, and you can borrow at 2 percent instead of borrowing at 5 percent, it is a benefit. But if you are Chuck E. Cheese, my favorite small company—actually, it’s not that small—and you could not borrow at all, and all of a sudden, you can borrow at 5 percent, that’s an enormous improvement. So, I don’t see this as the major cause of the concentration. I think technology played a role.

The other topic where he might be right is that regulation might play a role because regulation is quite asymmetric. It does represent a fixed cost. It’s very difficult for small firms to keep up with regulation. Certainly, what we know is that after Dodd-Frank was passed, we had no entry of new banks. For a few years, I don’t remember how many, there was no creation of new banks because the regulation was too big for anybody to even try.

Bethany: Wait, I have a comment on this. But before I get to my comment/question, I have a very important question. Chuck E. Cheese is your favorite company. Why?

Luigi: It’s my favorite example of the teeny-tiny company that has been around for a while, survives, but is not a darling of anybody. If you think about a company to which regulation probably applies because they don’t have a lot of lobbyists in Washington, they don’t have a lot of campaign financing, they’re not a big company with a lot of influence.

Bethany: Isn’t there a horror movie that’s based on Chuck E. Cheese? Or am I confusing two different things? Chucky and Chuck E. Cheese. Anyway, whatever.

I can’t help thinking that this might be a case, which is rare for you, where you’re putting economic theory ahead of practical evidence to the contrary.

I know economic theory would say that smaller firms would benefit in low-interest-rate environments. But when you look at the experience of the last decade, couple of decades, where big firms who might otherwise have failed have been able to access the capital markets at really low cost because investors are so hungry for yield in a super-low-interest-rate environment, that has led to the creation of all these zombie companies. It seems to me that economic theory might not be operative for the current times.

Luigi: You might be right there. That’s a different point than the one Ruchir makes. Easy money may slow down productivity increases. If you are saying that easy money helped Boeing survive a crisis and Boeing is now an inefficient firm, I think you’re right.

But if you’re saying that easy money helped pharmacies create an oligopoly, helped beer companies create an oligopoly, helped a dialysis center to consolidate, no. To some extent, that stuff is done more by your other good friend, private equity, rather than easy money. Now, easy money did help private equity, probably, but it is quite indirect.

Bethany: All right, I can see how the link between easy money allowing businesses to survive that wouldn’t otherwise have survived and, therefore, leading to monopolies isn’t necessarily a direct one. But still, I think there’s something interesting there.

I’m always fascinated by this idea that economic theory isn’t what actually happens in reality. Economic theory would also have it that the less-well-off benefit more in a period of super-low interest rates because they can borrow and get credit. When interest rates are higher, not only can they not get credit, but the interest costs take a bigger bite out of their budgets.

Yet Karen Shaw Petrou’s research showed that, actually, high-interest-rate credit cards and auto-loan rates decline very little in a period of really easy money. It’s actually, per Sharma’s point, too, the wealthy who really benefit from these periods of easy money. Again, it’s another place where economic theory does not seem to be what happens in reality.

But especially given the election and the well-publicized plans of Elon Musk to slash government spending, Sharma’s points about how difficult that is to do, and that even Ronald Reagan didn’t actually do that, are really, really relevant. What did you think?

Luigi: There is a lot of government waste that should be reduced and a lot of regulation that is self-serving and not useful. But there is also a lot of government help that is really helpful and a lot of regulation that is really helpful. The difficulty is not to cut expenditures and cut regulation. It is cutting the bad ones and maintaining the good ones.

Think about housing, which we discussed with Ruchir. The restrictions on building more are really evil because they restrict supply and keep prices high, especially damaging the younger generations. However, the building codes that make sure that houses don’t collapse when there is an earthquake or they are more resilient to hurricanes, or they are more resilient to potential power outages, and so on and so forth, those are extremely helpful. We see that when they disappear, looking at Florida, we have seen a condominium collapsing, killing a lot of people—including, actually, a Chicago student who was there at the time. I think that it is pretty important to remember this.

The same is true with government money. I think there is a lot of waste, but when we analyzed poverty with Matthew Desmond and with Phil Gramm, we saw that there are certain government expenditures that are really targeted to people who are starving, targeted to children in need, and cutting those is not good from any point of view.

Bethany: One of the things I liked about Sharma’s book, and one of the things that he was willing to say that is becoming a little bit more of a topic of conversation, is this idea that debt and deficits do matter.

You’ve had, in the last month or so, a couple of very prominent financial-market people, namely Stan Druckenmiller and Paul Tudor-Jones, who have run huge, successful hedge funds for many decades, come out and say that this is basically the biggest problem facing the US economy. I think that you and I might agree on this, so maybe there’s not a lot to argue about here.

Luigi: Oh, absolutely. As I said in the conversation with him, as an Italian who has seen the long-term costs of a very high debt-to-GDP ratio, I’m always very worried. I’ve always been a fiscal hawk to some extent. I’m particularly worried now because the growth has not been fabulous.

There is an important fertility issue that, yes, we can compensate for if we open our borders and let a lot of immigrants in, but the preferences of the majority of Americans don’t seem to be very much in this direction at the moment. The combination of these factors, I think, makes the burden of the existing debt and various obligations very heavy and difficult to dismiss like most people have done.

Bethany: We’re recording this episode just after the announcement that hedge-fund manager Scott Bessent would be Trump’s Treasury secretary. Luigi, do you have any thoughts on him or what he might be in for in this role?

Luigi: I don’t know him. He is kind of an interesting choice because, first of all, it dismisses all the stereotypes that people have of Trump. You’re going to be happy to know he’s going to be the first secretary of Treasury who is gay. He’s also a former Democrat—like, by the way, Trump was. He donated money to various Democratic campaigns, including, if I’m not mistaken, the one that Kamala Harris won to be attorney general of California many years ago.

But he was also an employee of George Soros, who is seen by the right as evil incarnate. I’m glad, actually, because it shows open-mindedness on the side of Trump. There is a part of me that feels reassured because if you come from the financial markets, if you are a former hedge-fund manager, the last thing you want to do is to screw up fiscal policy and have the bond market going haywire and, consequently, the stock market going haywire. In that sense, it is good.

On the other hand, I am a little bit concerned that all, or the vast majority, of the secretaries of Treasury, especially under Republican administrations, come straight from Wall Street. The very problem that Ruchir was mentioning is exacerbated.

Whether these people are in it for the money or in it for the environment, if, like Hank Paulson, you spend all your life at Goldman Sachs, Goldman Sachs collapsing is inconceivable. It is a tragedy. Even if you don’t have any shares in Goldman Sachs, you see this as the end of America as you know it because it’s true. It’s the end of America as you know it because that’s what you have known all your life. Hank Paulson is a very nice guy, et cetera. But he acted very much aligned with the interests of Goldman Sachs. I would not be surprised if Bessent behaves the same way.

Bethany: I might argue with you on that point, and time will tell. But people from the hedge-fund community are very different than people from the big-bank community. He is actually a very different figure than a big-bank CEO. People from the hedge-fund community have less loyalty to today’s big institutions than someone from a big institution does.

I think there’s this myth that big finance is all alike, and everybody is motivated in the same way, and it’s actually not true. People who come from the hedge-fund community can be quite anti-institutionalist, in a way that someone who comes from a big bank would not be. Bessent was reportedly part of George Soros’s huge bet against the English pound. If you come from a culture where shorting is encouraged, you have a little bit more of a contrarian bent.

I actually am really encouraged that he understands financial markets and is likely to be concerned about debt and deficits. But I was thinking, if I could be a fly on the wall for any conflagrations that are coming in this White House, I’d like to sit in on all the conversations between Trump and Elon Musk. Man, that one’s going to blow at some point.

But I’d also love to sit in on the conversations between Trump and Scott Bessent because I have to believe that that one’s going to blow up at some point, too. If Bessent does care about the debt and the deficits, then that’s going to put him at odds with Trump at some point in the near future. If what everyone says about Trump is true, that he does want yes people and people who are loyal to his point of view, that could eventually be a problem.

Luigi: Yeah, but this appointment suggests that Trump does not only want yes people, and I think he wants to please a particular side of the economy. I think that that’s why he chose Bessent.

Bethany: I hope that that turns out to be right.

Luigi: Indeed. The point I was trying to push Sharma on was that, because I wanted to see how far he was willing to go, is that it’s very easy to say “no bailout” to large firms. But the question is, are you also saying no help to anybody? Or are you saying we help people but not firms?

A point that Raghuram Rajan and I made more than 20 years ago, in our book Saving Capitalism from the Capitalists, is that if you want to prevent bailouts ex post, you have to have a safety net in place that absorbs the costs for people.

Otherwise, it’s too easy for the affected entrepreneurs to use the workers as human shields and say, “Oh, you can’t let the workers suffer.” Of course, this is just a ploy because at the end of the day, the real beneficiaries are the entrepreneurs themselves.

The only way to break this vicious circle is to have a good, functioning welfare state. Now, I’m in favor of a welfare state regardless, but in addition, I think that this is a very important point. I did not see him coming down on this point. He sounded more like an early-20th-century liberal, in the conservative way, who basically says, liquidate, liquidate, liquidate. Whatever damage happens, eventually, people are going to be better off. But we know that eventually can be a long time.

Bethany: When you look at recent history, that is exactly what has happened. Big business has used people as human shields from the financial crisis, where the big banks said, “If you let us go down, it will be incredibly destructive to the economy, and it’s the people who will hurt the most.”

In the Silicon Valley Bank collapse, the big venture capitalists who went to DC said, “You can’t let our companies fail because if our companies fail, then all these people are going to lose their jobs.” They didn’t say, “and we’re going to lose our investments,” which was, of course, the real story in each case.

You know my argument about supposed private credit. Exactly the same thing will happen if private credit runs into trouble. They’ll go to DC and say: “All the investors in our funds, the underlying investors, are actually pension plans. You can’t let us collapse because it will end up hurting all these people who are invested in our funds. By the way, the size we are, it will crater the economy. You can’t let this happen.”

I think it’s something that not only has happened in the past but is also relevant for the future. I don’t know, though, per your point, that a better welfare state would help that. That’s an interesting thought, and I’m not sure it would because the arguments are very sophisticated.

For example, in the case of the financial crisis, it was that people won’t be able to go to the bank and get their money out of a cash machine, and it will cause mass panic. In the Silicon Valley Bank collapse, it was employees of tech companies, who aren’t your usual recipients of a welfare state.

I suppose in the case of private equity, if people had a more secure retirement, then the argument that, “Well, you’re going to crater people’s retirements if you don’t save us” wouldn’t be a good one. I don’t know. I think the arguments are going to be so sophisticated that just having a better welfare state is not likely to fix it.

Luigi: I don’t think it is sufficient. I agree with you. But I think it’s a necessary condition because without this necessary condition, people would feel too insecure.

By the way, speaking of SVB, at a conference, I discovered this fascinating aspect. It’s a little bit technical, but I think that our listeners will enjoy the story, if I am allowed.

Many depositors in SVB, the ones with big money, had what is called a sweep account. It means that when your deposit exceeds a certain amount, it automatically is transferred into a money-market fund. Of course, if it’s a money-market fund, because it was backed by real assets, you were basically perfectly guaranteed. But if it was a deposit, and it was above the $250,000 threshold, it was not guaranteed.

However, the legal nature of some of these money-market sweep accounts was not clear. Many pay interest like money-market funds, but they are de facto deposits. Others are really money-market accounts that are legally separate.

In the famous weekend of March 2023, basically everybody went to a couple of law firms and tried to figure out which was which. They spent all weekend trying to figure out how many of these deposits were basically de facto in the money market, and so not at risk, and how many were at risk.

They arrived at the conclusion on Sunday in the late afternoon that, in fact, the vast majority was in real money-market funds that were legally separate and would not lose a dime. However, this arrived too late because by that time, Janet Yellen had already declared blanket insurance, and so, the problem was moot.

Bethany: Is that true? That’s an incredible anecdote. That might be one of my favorite stories of all time. Oh, my goodness. That is truly amazing.

I do really like your point that a better welfare state might be necessary but not sufficient. But I was thinking, while we were talking about this, that it is something that is lost in the regulatory framework and, I think, not part of the discussions about how to prevent future bailouts. What do you do with the populace when firms can mount a convincing argument that it’s going to be the people who suffer the most? How do you prevent that from happening?

If we were really trying to develop an antibailout culture or framework, then we would be thinking about that aspect of it as well. Not just laws like the Resolution Act for big banks, but actually thinking about what you do to make sure people are protected, so big, powerful companies can’t use that argument.

Luigi: Yeah, absolutely. All the mechanisms we have in place are trying to tie Odysseus to the mast. But you know that when things become too scary, then you’re going to untie him.

I think that what we need to work on more is creating the conditions so that Odysseus is not attracted to the sirens. In fact, you know that all the sailors in the story had earplugs so that they wouldn’t be seduced by the songs of the sirens. We need to put a lot of earplugs on our politicians.

Bethany: That’s a fantastic note on which to end.