Episode 55: Economic Myths with Jeff Yass - Co-Founder and Managing Director of Susquehanna

0:00Jeff Yass.

0:30US debt crisis, and then consumer surplus and the US tax system, and I guess these two general umbrellas. So I want to kick it off. We talked a bit, and I know you kind of have a nuanced way of thinking about what most people treat as kind of the looming debt crisis in the US. National debt's now one-to-one with GDP, and I think a lot of people are a bit anxious and scared about where it goes from here, if the US government might default. Why is measuring debt purely against GDP the wrong way to judge the US? Yeah.

0:56Jeff Yass:Well, I think if we have a problem, you want to diagnose the problem correctly. Otherwise, you obviously can't fix it. So we have roughly$31 trillion in debt. And we have a GDP of roughly$31 trillion, which we get the 100 % number from. But the United States, unlike other countries, has a wealth that is vastly superior to its GDP. So our wealth is probably seven times our GDP, you know, close to$230 trillion. That's because our stock market is worth$80 trillion or more than two and a half times our GDP. While other countries, particularly Europe, China, their stock market value and their GDPs are roughly one to one.

1:41Jeff Yass:So we're in a different situation than other countries. If you will, you know, and the quick way to figure out whether have a debt problem was compare it to GDP. And that was a pretty good approximation for a long, long time. It no longer is because our wealth is so enormous. If you were lending money to somebody and they said they made$100 ,000 a year and they wanted to borrow a million dollars, you'd be afraid to do it. But if you knew they had$5 million in the bank, you wouldn't be afraid to do it. You really wouldn't care what their earnings are. and the GDP is essentially your earnings, you'd only care what their real wealth is.

2:24Jeff Yass:So our real wealth is so enormous that the debt really isn't a problem. It's roughly 13 % or 14 % of our wealth, which is, I believe, an historic low. Now, it's pretty much an historic high except for World War II if you measure it to GDP. But if you measure it to wealth, which is really the only thing that matters, it's at a very low number. Now, the problem is, you know, the wasteful spending that we have is wasteful. We're losing, you know, spending$7 trillion when$5 trillion could have gotten the same job done. So it's a shame to waste$2 trillion a year. But we're not going broke. The way we go broke is if that$230 trillion wealth gets annihilated and goes down to$100 trillion, which is about where it was 10 or 15 years ago.

3:22Jeff Yass:Now, with bad policies, that can happen. But as long as we keep the growth engine going and people are productive and they're making new businesses and they're creating wealth, we really don't have to worry. So what we don't have to worry about is the debt. What we do have to worry about is destroying the golden goose that creates the wealth. Yeah. And I guess the point you're making is when you're analyzing a company, when someone wants to invest in a company, they don't just measure debt on balance sheet to what its current income. And income in this sense would be like GDP, but you're going to measure debt against assets.

3:58and so the US's assets are far greater than its income. And so, yeah, like you said, it's not a great way to make an assessment. It totally makes sense. I mean, I guess your point about -

4:08Jeff Yass:It's debt to equity, as you said, yeah. And I guess your point about like, don't limit or as long as the economy keeps growing and the stock market keeps growing, we're in a totally good place, if not a great place. Like you said, these numbers, one of like kind of the historical lows. I guess, what are these things that, if we limit, it can kind of kill the economy? What are these like general policies or whatever you think are somewhat kind of limiting? Well, you can have, you know, you can go back, and we might well see this in 29, regulation that makes it impossible for business to get started, super high taxes that makes it impossible for business to raise the capital to get started.

4:49Jeff Yass:Remember, compare us to Europe, we're roughly the same, you know, population as most of Europe, and we're 50 % richer. So it doesn't take a remarkable policy change to make us a lot, lot poorer. We could easily become Europe and then we will be in trouble. And it seems like we were also talking about this, that a lot of people in kind of the US, especially in this day and age where everyone has kind of a social platform and can go and talk about these things, kind of have a misconception about this thing that is like this economic kind of thing, this consumer surplus in the sense of they think that people who make a lot of money are value extracted from society.

5:28They take money from people or whatever. Like, what is the big myth around consumer surplus? What are most people kind of who are vilifying billionaires don't understand about consumer surplus?

5:37Jeff Yass:Well, even Jeff Bezos, who's a bright fellow, I don't know if he misspoke or he didn't understand understand it, he would talk about how Amazon was worth$2 trillion, and he only owned 10 % of it. This was a while ago. So he had$200 billion, and the other$1.8 trillion was made for investors. So he said, I only took 10 % of it. The other$1.8 trillion went to investors. And that's true. But the real value that Amazon added is what we call consumer surplus, which is it made life so much easier and saved us so much time that that number dwarfs the market capitalization of Amazon. I would say it's at least five times greater, that$10 trillion worth of wealth was created because it saved, if you measure in how many hours it saved us, and you give that a multiple of 20, it would come to something like$10 trillion.

6:42Jeff Yass:So really, Bezos made$200 billion, the world made over$10 trillion. So he really only got 2 % of it. And that's a more realistic number of what entrepreneurs do. I say the typical number is somewhere around 10%. So most of the money, most of the wealth created is just given to the consumer because you bought something at a much lower price than you're willing to pay for it. I think the easiest example is Tylenol. If you've ever had a headache and you had to pay Tylenol a dollar for two aspirin, I think you would have paid a lot more to get rid of that headache. So Tylenol makes a little bit of money, not too much, and you don't have a headache.

7:32Jeff Yass:What you would pay that dollar versus having a headache, you might easily pay$100 not to get a headache. So the vast majority of the benefits go to the consumer, which leads you to policies that would say, we want all these entrepreneurs creating these great things. We want more Amazons. We want more Tylenol. And to have a tax system and a culture that vilifies these people is absolutely upside down. And I think a lot of people just also don't, they go and they go after especially people on Wall Street in the sense of there isn't as much like, they don't see as much direct value add to as businesses like Amazon and these kinds of things.

8:20But the truth is any kind of business, people wouldn't use it or even businesses like your own contribute to making markets more efficient and this general greater good or else it wouldn't be in business. The only reason these businesses still survive and still thrive is just people actually use them because it's beneficial to them. Exactly. Like you said, a misconception a lot of people don't understand. And I guess as we're on this topic, Do you think there are like any other kind of misconceptions people have about the ultra rich? And I think a lot of people think that out to get them out to get kind of manipulate and extract value from the kind of middle and lower class.

8:57Like, are there any other misconceptions or do you think this is the biggest one or?

9:00Jeff Yass:Yeah, I think it's sort of the biggest one that is. I mean, the big misconception is to many people, Elon Musk has a trillion dollars. That means he took a trillion dollars from somebody else. One big pizza pie. And this guy came in and took all the slices. You know, that is really how many people view the view the view the world. So that's that's a misconception that's been going on since Karl Marx and, you know, probably way before him. But I think the the misconception and people talk about that. I mean, you know, you read, you know, editorials and stuff and they'll all make fun of the idea that it's a zero sum game.

9:39Jeff Yass:So that's out there. It's out there intellectually. It's not really out there. politically. But intellectually, I think we really never, because it's difficult to measure, we don't talk about the consumer surplus, which is really the, you know, most of the value added. Just think of Uber, you know, you know, they make some money, they don't really make a lot. And just think how they change life, because you can do so many things, you know, because Uber is so easily acceptable, and we just take it for granted. But guess what, it wasn't here, you know, 25, 30 years ago, someone had to invent it.

10:14Jeff Yass:And it just changed life. Just think how thankful you are that you have Uber all the time. And the company itself is really, you know, it's profitable, but it's not that profitable. And its profitability is a fraction of the value that it added to the rest of the world. Yeah. And then, and as you said, like, like, there is more value being created than destroyed, which is also why our economy is growing and has grown. And we're in this very unique position, like you mentioned before, that the kind of US stock market is somewhere around like$80 trillion, which is in most companies you compare, I mean, in most countries, you're comparing the stock market size, and it's usually one to one with GDP or debt or whatever.

10:55But in the US, we've, I guess we've, you could say we've created so much consumer surplus and so much value that we're in this kind of position where our economy is so huge and kind of thriving. And yeah, I think you also mentioned this before of, I guess we've talked a bit about how you think the current US tax system is broken in the sense of a lot of people go streaming tax to rich, tax to rich. What do you think is fundamentally broken about a progressive tax system when it comes to how do we reward entrepreneurs for creating value, for creating

11:32Jeff Yass:Well, besides just the philosophical problem, there's just a literal technical problem. Elizabeth Warren will say that Jeff Bezos pays no taxes because if he owns stock in Amazon and he doesn't sell it, you know, he may have no tax liability for the year. He's building up a huge tax liability in the future as the stock goes up. But Amazon, the corporation, pays taxes. So Bezos doesn't write a check to the government. Dear government, here's a check from Jeff Bezos. The Amazon writes the check on his behalf. So when she says he pays zero taxes, if Amazon makes, you know,$100 billion a year and pays$30 billion in taxes, 20 percent of that or$6 billion a year is his.

12:18Jeff Yass:So he's paying$6 billion a year through Amazon, not zero like Elizabeth Warren thinks. Now, that's just a factual thing, not a philosophical thing. If Amazon was a private company, he would be paying$6 billion a year in taxes. He pays zero, but the company pays it for him. So what's the difference? That's the mega myth. That's just irrefutable. And it's just nonsense to say that he doesn't pay taxes. So that we could at least disprove without any philosophy, this is just accounting. And then the other myth is when you think of like Warren Buffett, he said, I'm going to pay as little taxes as I possibly can.

13:07Jeff Yass:He did everything legal in the tax code to avoid it. And at the end of my life, I'm going to donate it all to charity. which is more or less what he's done. And he chose to give it to Bill Gates because Gates convinced him that if you want to eliminate human suffering, the best place to go is Africa and bring medicine and food and vaccines, et cetera, to Africa. So that's what he did. So for all this while, we might be vilifying a billionaire. At the end, he threw it back into the ocean. He didn't do anything with it except try and help the poorest people, you know, you know, live a happier, healthier life.

13:45Jeff Yass:And for that, he's vilified. And they just forget to follow the whole stream of money. He just didn't have a big blowout$100 billion party, you know, before he died, he gave it to Africa. Now that makes me think he's a pretty good guy and a pretty valuable member of society. But to some, they want to confiscate that money, they want to use it to buy votes for themselves. And they really don't give a shit about poor Africans. And especially in your case, I guess, like people know about the giving pledge and things like this. But there's also like, from what I've read, you have some like massive philanthropic kind of endeavors.

14:24I guess like, what do you, in your specific case, what do you care about? What do you give to? I know you care about school choice and like, what are these things that you give to?

14:33Jeff Yass:Well, I find the biggest lever to relieve, suffering in America is to legalize the education system. That if there was competition in schools, kids would be so much happier, they'd be so much freer, they'd be so much better educated, and they'd do it at half the price. The example I often give is$43 ,000 per kid in New York City. The best Catholic schools cost less than half that. You can give a kid a voucher, he can go to the Catholic school or the charter school, the private school, and you can put that money in a bank account. And when he graduates, he'd have$300 ,000 a year. That's how much waste and fraud there is in the education system.

15:13Jeff Yass:So you can eliminate the so-called affordability crisis in one fell swoop, just legalize education, take it away from this ridiculous government monopoly that just spends more and more and more and doesn't get any results. So I find that, you know, in my philanthropy, it's like this is a great idea, but it's also idea times the probability that it's actually doable. And this, I think, is politically doable. I have other ideas that may be just as big, but they have zero chance or very little chance. So I don't I don't worry about this one. When you multiply the parlay, you know, if school choice, then will it pass?

15:55Jeff Yass:That, I think, yields the greatest benefit. For sure. And I guess kind of to to to your points here, why aren't people doing this? What's like the root cause of why these why why the government are like, why aren't people kind of making these things? I think, you know, people do have no idea what it costs. You know, one of the things that government does very effectively is they don't send you a bill for school. When you go to, you know, seventh grade, you're not getting a bill of forty three thousand dollars. You know, it's all smushed in and other taxes or other people. And you don't know if they sent you a bill, you would go nuts and people would would change their behavior.

16:39Jeff Yass:But that's largely what what keeps the fraud going. Yeah, there's a there's a very good way of hiding it and spreading it out. And yes, this makes a little sense. That's why I want to connect the dots. It's like if you say to people, we can find waste and fraud and the deficit is going to go from two trillion to one trillion. People like, well, good, good. I don't care. My life. You got to give them that trillion dollars. And the idea that we're trying to get through in school choice is we're going to get rid of the waste and fraud. We're going to get you a better education and we're going to give you the savings.

17:16Jeff Yass:So you're actually motivated to do it. Yeah. And I guess I want to kind of ask one final question to you. We've gone through some, we've kind of debunked some economic myths or myths, a lot of the kind of US beliefs in this day and age. And this is a question that you've kind of recommended I asked my guests on the podcast. And so I guess we'll start with this one. This will be the first. But all this being said, if you were to pick one or your best idea to make America freer or more prosperous as a country, what would it be? Well, the best idea, which has zero chance of happening, that would be listen to the Ninth and Tenth Amendment of the Constitution, which basically says if we didn't say it, if we didn't explicitly state that the government can do it, you can't do it.

18:04Jeff Yass:That's what built America, that it kept the government small. It kept us. It kept it less corrupt than other governments. Now, that ain't happening. But I think we can convince people that the next time we're having a welfare program, just make it a voucher. There's no reason the government doesn't own the farms and the grocery stores. So they didn't. They give out vouchers for food stamps. The government should not run the schools. They should just give out vouchers. The government should not run the medical system, the health care system. They should just give everybody a voucher. Now, that would be a welfare state, but at least it would be a vastly more efficient welfare state than the one that we have now.

18:48Jeff Yass:And while it's far from a perfect solution, it's, I think, about the best that we can do. I would say voucher, voucher, voucher. I don't think anybody could be acting in good faith when they prefer a government-run system versus just a system where the government gives out a voucher. 100%. I couldn't agree more. Well, Jeff, it's been a pleasure doing this again with you. I'm super excited for kind of people to hear and learn from this. And hopefully at some point in the future, we do it again. Okay. Thanks, Amir. It was fun.