What Went Wrong with Capitalism? — with Ruchir Sharma

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1:13episode 305 305 is the area code belonging to parts of florida true story a man after killing his partner and then eating his partner took his dog for a walk how come you just knew that guy lived in florida not a joke not a joke go go go

1:41Welcome to the 305th episode of the Prop G-Pod. I am still in the south of France, the Cannes Line Festival. My Pivot co-host, Kara Swish, and I recorded live on stage at the Adweek house. You can hear that episode over the Pivot feed tomorrow. It was lovely. It was lovely. We had rosé after. It was very nice. Also, the Olympic torch came marching through. Does anyone care? Does anyone care about the Olympics anymore? I got invited to the Olympics and I said to my kids, hey, do you want to go to the Olympics? And they're like, what are the Olympics? Literally, they're like, do we have football tickets?

2:14You know, soccer. And I'm like, no. And they're like, no, we're not interested. We don't want to hear, we don't want to see 100 hours of diving, swimming and discus throwing. It's such an interesting case study. And I don't know the answer and why the Olympics have fallen so far and the World Cup has ascended at such an incredible pace. Anyways, I'm making the rounds again. I like it here because people come up to me and say hi, and I purposely take my boys into town because I'm desperate for their affirmation. I want them to see that what I do actually gets some recognition. So what are we doing?

2:46We're skipping our news headlines and busting right into our conversation with Roushear Sharma, the chairman of Rockefeller International and founder and chief investment officer of Breakout Capital, an investment firm focused on emerging markets. We hear all about Roushear's new book, What Went Wrong with Capitalism. Okay, Rishi, where does this podcast find you? I'm here in New York, in Midtown. Oh, nice. Well, let's bust right into it. In your new book, What Went Wrong with Capitalism, it's really a critique of capitalism, a capitalist critique of capitalism, as you say. So tell us, how has the system been ruined?

3:19Yeah, I think I've been showing the book here, Scott, which is the fact that if you look at what's been happening in America, pretty much a lot of the Western world over the last few decades, is that we have progressively seen greater and greater government intervention in the economy. The suite of habits extends to just more than government spending. Government spending in the shared economy has gone up from a century ago at just 3 % when the government would do little more than deliver your mail, to about 36 % today. But it's not just that. It is, if you look at the regulatory state, we look at the impulse to bail out, the proclivity to manage the business cycle.

4:02Just across the board, we have seen a massive increase in government intervention in the economy with the consequence that it's destroyed the creative, destructive fiber of the economy and productivity growth has been declining for the last few decades as well. So that's the point I try and make, which is that there are lots of perverse consequences that have come out of this systematic intervention in the economy. And those consequences include declining productivity, rising inequality, and also this feeling amongst most Americans that the system they have in place is not working. Nearly 70 % of Americans want big economic change or want the current economic system to be torn down.

4:50So let's break that down. So it's impossible to deny that government spending is not out of control, right? $7 trillion on$5 trillion of receipts. There's been unbelievable or staggering bailouts. I think$6 trillion to$8 trillion COVID relief. The only thing I would push back on or require or would double click on is this notion that we're overregulated. My sense is that some of the biggest industries are underregulated and we've had monopolies form. Your thoughts? Yeah. So again, let's look at the data, right? Which is the fact that America is introducing 3 ,000 new regulations a year, and that's gone up over time.

5:31And I argue in the book that, in fact, regulation tends to be pro-incumbent and pro-big business, because when you introduce new regulations, the existing people are able to game the system much better, get the regulations they want. And also, it makes it that much more expensive for new companies to come up. So, therefore, it's one of the reasons I think that the number of startups in America has been declining right up until the pandemic. We saw a big decrease in the number of startups in America over the preceding two or three decades. So, I would say that, yes, that we possibly can do with better antitrust regulation, which is what I think that you're alluding to.

6:14But I think that we sort of have to see that in every industry otherwise, we have seen regulations increase, and that tends to hurt small and medium-sized businesses from coming up. I know it's from personal experience that the cost of, let's say, setting up a new fund is up 10 times over the last 20 years. That makes it very difficult for someone looking to set up a new fund and breaking even compared to some large fund which is already there, has the resources, has the legal compliance departments to deal with all this? So it makes sense that certain industries, such as financial services, where more compliance, you know, Sarbanes-Oxley, whatever you want to, it just gets harder and harder and harder to compete or to start up.

7:00My understanding is, there were more new business applications or permits filed last year than in history. And two, it does seem, though, that some of our biggest industries have figured out a way to weaponize government or weaponize lobbyists. But what you're saying is the majority of industries are over-regulated and this suppresses economic growth. Do I get that right? Absolutely. So I'd say, you know, like, and you're correct that we did see like a spike up in new businesses or so over the last couple of years. But a lot of that was because during the pandemic, many had to shut down. So that's a bit of a churn which is going on.

7:38That's not been the true trend over the last 30, 40 years. So I think you have to keep that in perspective. And the second point, as you say, is that, yes, you know, there has been some deregulation. For example, there's been financial sector deregulation, which is why financial markets have exploded a lot. But I'd say for most industries in things like hospitality and things like restaurants and stuff, the number of regulations that any small business has to deal with has gone up a lot. And that shows up in all sorts of ways. For example, if you look at the number of lawyers in America, America's always had a very large legal population.

8:13The number of lawyers per capita is about the largest in the world. But again, that this growth has exploded in the last 20 years or so. So it's clearly in terms of who's benefiting and even in terms of lobbyists that you point out, which is that the number of lobbyists in Washington have been captured by all the big tech firms. The big tech firms dominate the number of new lobbyists in Washington or just total spend on lobby. So in your book, you say in the 2010s, economies worldwide began to slow. Why did this happen and where are we today? Yeah, so productivity growth across the world has been slowing.

8:52And so I think that this is what, in fact, looks America a bit better, which is that the productivity growth in places like Europe has been slowing even more than what's happened in America. But the point I make in the book is that's partly because there, the kind of state intervention they have, the regulatory phalanx that they have is much greater than even here in America. So that's not the right benchmark. But in general, I make the point that productivity growth has been slowing everywhere in the midst of what is otherwise such a powerful tech boom. And this is a trend that predates even the 2010s.

9:27It's been like on a decline, apart from, you know, like a brief surge in the late 1990s and early 2000s. when you had the internet revolution, productivity growth has been generally slowing everywhere. And I deal with this productivity paradox in the book extensively, saying that what could be causing this? You know, all these arguments that it's because of mismeasurement and all, but that's not true because, you know, like in the late 90s on the back of the internet, boom, you did see a temporary surge. So I think that the reason economic growth has been slowing a lot has to partly to do with demographics, that yes, population growth across the world has slowed down.

10:03There's not much we can do about that. But as far as productivity growth is concerned, that too has slowed down significantly, despite some tech innovations that have taken place. And now we are hanging our hat on AI boosting productivity. But I think that, as I said, that the capitalist, creative, destructive fiber of the economy has been undermined because we're keeping alive so much deadwood. I mean, today, the number of zombie companies, as I say, that we have in the economy today, by some measures, is close to 20%. What do I mean by that? These are companies that are defined as firms that are not earning enough profits to even cover their interest payments for three years in a row, but keep going back to the market to refinance themselves.

10:50And when we do that, we sort of obviously undermine productivity growth in the economy. Yeah, I'm a big believer that you need churn for a robust economy and that the incumbents don't want churn. Just let me put forward a thesis, and I'd like to get your response, that one reason why we've seen a decline in productivity is because of low corporate tax rates. And that is corporations have a memory, and when they can get 80 cents on the dollar out to a shareholder, they will choose to distribute earnings. Whereas if the tax rate is, say, 40 percent, and they're only going to get 60 cents out, and they get sort of a 40 percent reduction in the price of reinvesting in the company and plan property and equipment to grow the top line, that the incentive is to, or the hurdle rate for a go on investment is lower when tax rates are higher.

11:44Is there any truth to that? Well, the evidence, again, doesn't really back it up, right? Because if you look at what's happened in Europe, you know, wherever, you know, like the corporate tax rates have been higher, they haven't been able to sort of get higher productivity growth either. So I just don't see the evidence of that. Yes, I do feel the fact that the tax system could do with a big overall. I think we all agree with it. There's too much of a disparity in the way that a W-2 wage earner is tax compared to how much lower capital gains taxes are. So yeah, there are other distortions which I completely agree with.

12:18But I think that in the book, what I'm going to focus on is the fact that what happened to capitalism? What did the founders have in mind? Is the system today what we have capitalism? And why are so many young people in places like America disillusioned with the world capitalism? As I say in the book, the surveys show that most young Americans, particularly Democrats, say they would rather have socialism than capitalism. That's a really big statement for a country that was the founder of Pro Practical Purpose as a capitalist system. We'll be right back. Tuesday on NBC, Jimmy Fallon and Bozema St.

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13:35And I think this season's lineup is even cooler. And so does my wife who keeps stealing all my hoodies. Stay fit for the season and Abercrombie's newest arrivals. Shop NFL by Abercrombie in the app, online and in store.

13:57When did making plans get this complicated? It's time to streamline with WhatsApp, the secure messaging app that brings the whole group together. Use polls to settle dinner plans. Send event invites and pin messages so no one forgets mom's 60th. And never miss a meme or milestone. All protected with end-to-end encryption. It's time for WhatsApp. Message privately with everyone. Learn more at whatsapp.com. So let's assume that we agree that most people agree that we need to cut government spending. Where do you think we cut it? So that's the point, right? Which is that how do you prioritize that?

14:34I mean, what is the Biden administration done? It has just doubled down on its spending. So now it's spending on everything. It's spending on industrial policy. It's spending on the CHIPS Act. And I think on an individual basis, when you look at government spending, we all think that, yes, you know, like in terms of each one is justified. but I think that the thing is like we need to prioritize that don't we need entitlement reform should we really be spending on industrial policy because our priorities are different if you want a welfare state if you want to give people lots of you know like in terms of even cash benefits as some people want to do I think it's about prioritizing that what can we do realistically and this thinking that debt and deficits don't matter because so many people for so long have been crying wolf about this, right?

15:21Which is that in New York, we have had these debt clocks, which have been up for decades. And it's because nothing has happened, we think that what's the problem, we can go on spending this way. And there is no real consequence to that. And what I try and sort of show here is that yes, there is a consequence. One, that because of this, we have already seen a decline in terms of productivity because of the suite of government habits. And two, that now we are taking this just to a ridiculous extent that America used to run a budget deficit of around 3 % of GDP for the last couple of decades. It was in line with other developed countries.

16:02Today, we're running that at 6 % of GDP, way higher than any developed country in the world. And our public debt as a share of the overall economy has crossed 100 % and is only behind that of Japan and Italy, and at this pace, we'll be higher than Italy by the end of the decade. So I think that the problem is this, which is that the argument that debt and deficits will cause a crisis seems very stale now because nothing has happened despite these crisis warnings for so long. And there is this real confidence which almost borders on arrogance that because we are America, you know the world will keep funding it we have the world's main currency which people use so they keep buying dollars and we'll never have a problem you know it's that kind of complacency and arrogance about you know where else will the money go it has to come here which sort of bothers me and and we were not that way uh and in fact i have you know still like a lot of great things about america but i think that what's happened now is that we've just taken this to another extreme So the Biden administration calls you and says, OK, give us two or three things, magic wand, you would want to see implemented right away in terms of policy or laws or tax policy.

17:21What would those two or three things be? Yeah, I'd say that in terms of if I know that nobody listens until they have a crisis. So I doubt I'm going to get that call. But still, I think that, you know, let's think about it. I'd say that in terms of one thing, you know, like stuff is that think about every time you do a new regulation. Who's it hurting? And who's it benefiting? I mean, I'd put a freeze on that. I mean, Trump tried something like that, but it was a failure by the end because, you know, he couldn't focus on anything. So talked about not putting new regulation. But by the end of the administration, there were tons of new regulation which were going on.

17:57So I'd say that in terms of focusing, in terms of, OK, some tougher antitrust regulation. Yes, I'm in favor of that. But the vast swath of regulations that are put in there really hurt small and mid-sized businesses. So think about putting a new regulation. Two, you have to think about the debt and deficits, which is that don't have this callous attitude that nothing has happened. There's been no crisis. So we can keep running deficits. We are at full employment in the economy and we have a 6 % budget deficit already. Imagine if you have a downturn, it'll be 9 % or 10%. same. So I would say that in terms of, you know, the open-ended CHIPS Act industrial policy, we need to put a check on that.

18:39And I think that the other thing that I would say also is the fact that to make a very clear statement that we're not going to bail out companies at the slightest hint of trouble. I mean, you know, that statement needs to go out because today you speak to people in private, in the private equity world or other places, there is a implicit assumption that, you know, what the hell, we'll give it a punt. And if it doesn't work, yeah, I mean, you know, the government's there to back us out. So that sort of thinking has to go away. So these are just broad points, I would say, at this stage that we need to think about.

19:12A moral hazard. So, Rasheer, you have done a great deal of work on India. Can you give us, I would love for you just to sort of give us the cliff notes on the Indian economy and what you think the prospects are for the Indian economy over the next several years. yeah so in fact I begin this book like in the prologue by speaking about my journey from India because as you say I was born there and I and India was a truly socialist economy when I was born in in the 19 in the mid 1970s and so I saw what socialism could do but fortunately for India after especially it faced an economic crisis in 1991 it's progressively been getting freer progressively we've been moving up the indices of economic freedom.

19:56And so therefore, you know, like I've been much more optimistic about the economy as that's happened. But my favorite line about India that I came up with a few years ago is that this is a country that consistently disappoints the optimist and the pessimist. So there's a lot of optimism I have, but I would keep it in check to know that this is a pretty complex country. It's not a homogeneous country like China, which moves in one direction. It's very heterogeneous, very diverse. So you've got different things and different, you know, places which play itself out. But generally, I remain optimistic.

20:30I feel that the trajectory is positive. And of course, we can't not have this conversation and speak about the landmark election result. And, you know, that's a very hopeful sign, which is the fact that it's a country, you know, which believes in its democratic tradition. And I think that that's something which also helps the long term, because this is a lot of research that I've done that, you know, like under Modi, there was a real fear that India was moving towards an authoritarian direction. Now you will argue maybe that's good for its economy, because you're moving in an authoritarian direction, and you can take tougher decisions.

21:03But the research I've done on this is the fact that under authoritarian regimes, you end up either getting very good economic outcomes for a while, or you end up getting disastrous economic outcomes because there's no one to tell you, you know, when you go wrong. And I think that there was a risk that India was moving in that direction. There's more checks and balances here. And typically over time, democracies tend to compound much better in terms of growth rates than authoritarian regimes do. So I feel relatively optimistic about India. Yes, there'll be some sort of bitter fights politically after the election result last week when the opposition feels emboldened.

21:42But I think that, you know, it's moving in the right direction. The only thing I'll keep in check is expectation that this is no next China, which is going to grow at 9 or 10 percent. It's going to be more like a 6, 7 percent type growth rate at best that we'll see in India for the foreseeable future. So now do UK. I live in London and I would just be curious. You obviously spent a lot of time thinking about, you know, how your title, 10 Rules for Successful Nations and Breakout Nations, in pursuit of the next economic miracle. Let's assume this is not going to be an economic miracle. I think that ship has sailed.

22:15But what rules are they following or breaking or not adhering to when we talk about successful nations? Well, unfortunately, I think that UK doesn't rank well, you know, because as you rightly say that I maintain this ranking of these, you know, like of all these countries and, you know, where they rank on these various metrics. And in the Anglo-Saxon world, of course, the country that has been doing the worst which i think you know like a bit of a surprise and i wrote about that is canada that's been the worst really over the last you know 10-15 years and then next comes uk then australia and the u.s compared to these countries has been doing relatively better and that's the irony of it uh you know in terms of all the problems we've spoken about in america but in terms of all the problems we spoke about in america in terms of are much more severe in places like UK back there in terms of what it's been doing with its deficits, although America now has overtaken it, in terms of what it's been doing in the number of zombie companies.

23:15So I'd say that in that regard, UK, in fact, ranks even worse than America on most metrics. So isn't, it's really fascinating, Australia, Canada, and the UK not doing well. So take them, add in the US, are we all guilty of overspending, capitalism on the way up, socialism on the way down, cronyism, bloated government, bailouts? But the difference is the U.S. has AI and a tech sector that just creates so much economic value and draws capital from the rest of the world that at least props up or wallpapers over our problems more so than those other three nations. What do you think? Absolutely correct.

24:00Yeah. So that's the, that's my summary that, you know, which is the fact that, you know, like it just pains me that in terms of the fact that I don't even compare America to these other countries because America is still the beacon for the world, right? It's still the largest economy that everyone looks up to, to see as to what is American doing. And the American brand of capitalism, unfortunately, has been dented. But you're right that these Anglo-Saxon other economies that you pointed out are arguably in worse shape and doing things even worse than America is. And America, as you point out, has the success of the tech engine there.

24:38But again, it's slightly concerning to me that the, like in America, the domination is getting so concentrated that the value is being created, but it's being created in just very few select companies, you know? And I think that that is a real problem. And communities. I'm so big. Yes. Yeah. It is really striking. What do you think about the notion of, so the one thing we didn't talk about that I think plays a big role in all of this is immigration policy. Compare and contrast different immigration policies across the nations you look at, and what do you think is sort of, if you will, the ideal, if there is an ideal immigration policy, and what does it indicate in terms of America's immigration policy?

25:21Yeah, I think that, you know, as far as America's concerned, even though it's been a big problem in America and it's a big political issue, America's at least been better at assimilating immigrants than a lot of European countries in that regard. And I think that countries like, you know, Australia and all, you know, have been, you know, like pretty good in terms of as well. So I'd say that generally here, the Anglo-Saxon world has been better than Europe in terms of assimilation of immigrants. But again, as I said, that what is good economics is not always what's good politics, which is that even last year, like I pointed out, that immigration is what really helped countries like America avoid a recession and bring inflation down much more than other countries did last year.

26:13But the problem is the fact that it's become such a political issue about tearing apart the social fabric and stuff, that what is good economics in obvious terms is not good politics. And I don't see that changing. So I'd say that, yes, I think that immigration is out of control for many people out here in America. And so we're going to clamp down on that, regardless, I think, of what happens in November. But in general, I would say America and the Anglo-Saxon countries like Australia have done a better job at assimilating immigrants compared to European countries like France. Well, let me say something that's, I don't know, is wrought with emotion.