Episode 714: What Went Wrong With Capitalism

Published Jun 25, 2024, 10:23 PM

Newt talks with Ruchir Sharma, author of the new book "What Went Wrong With Capitalism.” Sharma discusses how capitalism has been distorted by constant government intervention and the spread of a bailout culture. He argues that governments, from the United States to Europe and Japan, have pumped so much money into their economies that financial markets can no longer invest all that capital efficiently. Sharma also discusses his upbringing in India and how it shaped his views on capitalism, as well as his career at Morgan Stanley. He suggests that the solution to current economic issues is to reduce government spending and control, and to reform entitlements.

In this episode of News World, What Went Wrong with Capitalism? For a century, governments have expanded in just about every measurable dimension, from spending to regulation and the scale of financial rescues when the economy wobbles. The result is expensive state guarantees for everyone, bailouts for the rich, entitlements for the middle class, welfare for the poor. Governments from United States to Europe and Japan have pumped so much money into their economies that financial markets can no longer invest all that capital efficiently. The first step to a cure is a correct diagnosis of the problem. Capitalism has been badly distorted by constant government intervention and the relentless spread of a bailout culture. All of this is detailed in the new book What Went Wrong with Capitalism? So I'm really pleased to welcome my guest, Ruchair Sharma. He is currently chairman of Rockefeller International and founder and chief investment officer of Breakout Capital, an investment firm focused on emerging markets. But Chier, Welcome and thank you for joining me on news World.

Thanks Neil, great to do this with you.

By the way, Congratulations on the attention your book is getting. I think it's going to have a big impact, and I think you've certainly earned it. But I'm curious, how did growing up in India shape how you saw capitalism when Lute.

I grew up in India much in the nineteen eighties, when India was still largely a socialist country. I was fortunate enough to spend a few of those years in Singapore. In fact, because even though I was born in India, my father was in the Indian Navy and he got posted to Singapore for about three years or so. That was quite an eye opener for me. I was young and very impressionable, but when I went to Singapore from India, I saw that how that country was prospering in the late nineteen eighties as its leader gave its people so much more economic freedom that even though Singapore didn't have that much political freedom back then, it gave its people a lot more economic freedom, a lot more than the Indian policymakers were doing.

And I saw the big difference.

The Singapore and economy was booming and the Indian economy was still in per capita income terms barely growing up unto the nineteen eighties. So that's really sort of my first introduction about the fact that how much giving people economic freedom can make a big difference. Because India, as you know, gave its people lots of political freedom after its independence in nineteen forty seven, it just didn't give its people enough economic freedom, and that process only began post the nineteen eighties kind of era. And a big role model in all of this was the United States. The United States was seen obviously as the beacon of economic freedom, the symbol of capitalism, and I was very influenced by what was happening in the United States as well, and very drawn to the capitalist system and the vitality and the economic freedom that it gave, and that countries like Singapore and other countries were emulating, and countries like India, which for a while were more fascinated by the Soviet Union, obviously came up well short of the likes of Singapore. So I think that influence in my formative years when I was a teenager and seeing the contrast between America and India, or India and Singapore, that's what really formed my impression and also gave me such faith in the fact that giving people economic freedom and having a capitalist economy is the best way to lift people out of poverty, to give people the sense of opportunity and to create wealth at the top.

What was your sense, So what was driving that changes and to what extent it was driven by politics and to what extent it was driven just by share entrepreneurial effort.

I think a combination that India always had great entrepreneur spirit, but that was severely constrained in India under what then was called the license raj, where you know that businesses and entrepreneurs were tied up in so many licenses and regulations that it could never allow them to flower. And then you had the event where the country literally ran out of money. The country literally went bankrupt in early nineteen ninety one.

And the best time and the country carries out economic.

Reforms, unfortunately, is when it has its back to the wall and it has run out of other people's money to spend. So that's when the government began or was forced to in a way to liberalize, to open up its economy, and the Indian economy after sort of losing share in the global economy for much of its first thirty five years of independence, after that you began to see a big takeoff in the Indian economy.

And something which even China did.

As you know that we often think of China as this communist state and today we think of China as a very statistic country. But China did exactly the same thing, which I think is somewhat misunderstood. That Chinese growth was driven with the government starting from a very restrictive position and in the economy to giving its people much more economic freedom, property rights, and other rights, and the Chinese economy did spectacularly well. China, by some measures, gave its people much more economic freedom than even India did for the last thirty to forty years under Jijing Pink came to power, so that model really seemed to be the way that the world was going to benefit much more economic freedom to its people. And I think that that's also what got people to think in America and in the West that market forces were in the ascendant, which is that these countries were adopting market policies and prospering and globalization was taking off, and so a lot of people thought that this is the new liberal era and these countries are.

Doing so well, and that's what's happening.

But what I think was missed in this was that While that was happening, the countries in the western world America and even more so Europe started moving in the opposite direction. They were moving away from a limited role of government to a much more expansive role of government. And by the time the pandemic hit in twenty twenty one, the lockdown, I think was shaped by this government's hubris that we can lock people down and just give them money to sit at home and everything will be fine. And secondly, I think the fact that the pandemic was the amount of stimulus that was put and the kind of intervention that was done in the pandemic just brought for me to the four that wow, that this is how much we have moved where now we think that capitalism can be entirely run by the government by keeping people shut at home and the damage that's likely to cause. So that's when this book idea is shaped up. And as I say in the book, this is very much a pandemic baby.

Unusual background, I mean, right out of high school you began writing for the leading financial paper in India, writing a column and global markets. When how do you get a job like that at seventeen years of age?

Because at that age, nobody else wanted to write about it. India was still a relatively closed economy, and I guess I was just fortunate that at a very early age I knew exactly what I wanted to do, and I just happened to sort of, you know, stumble upon a lot of economic and financial literature which naturally attracted me. So that's when I decided that what I really want to do now is to write on economics. And I was quite clear at an early age that eventually I want to also learn how to make money with it. But at the age of seventeen, I couldn't relieve people of their wealth. So the next best thing to do was to write about it. And because nobody else was writing about it, because it was not considered cool at that point in time to be writing about global stuff. It was considered marginal, almost as India was a largely closed economy, I started to write about it, and that's what set me up then to come to the United States eventually and follow my dream.

Here.

You went from being a journalist to spending twenty five years at Morgan Stanley, where you're head of Emerging Markets and chief global strategist. I mean that must have given you a very different view of the world.

Yeah.

So I was never a full time journalist, but as I said that, when I was in college, since I couldn't get anyone to give me that money to manage, I would write regularly and that eventually caught the attention I was coming to my PhD in fact in the United States, and that my columns caught the attention of some of the top people at Morgan Stanley because they also had a presence in India. And I got a call as part of our interview process, and the offer made to me was that do you want to make money or do you want to study? Because I was going to do my PhD, I said, I want to make money. I give up my PhD ambition and I joined Morgan Stanley and I started my career there. And yes, it gave me an incredible amount of exposure because I had baptism by fire. I saw the East Agent financial crisis in ninety seven ninety eight. I was in Asia covering that as an analyst and fund manager at Morgan Stanley, and then I moved to New York in late two thousand and two and it was the Heydays of globalization and you know, like such faith in the American dream that you could come here as an immigrant and like you had no restriction to moving up and the upward mobility that America offered was incredible. So and the other sort of insight it gave me also was how Wall Street functions, and you know, like what happens there. So therefore, this book, as I say, is both an insider's account and an outsider's account of how financial markets function, how the global economy functions. Because at one level, I was this outsider coming from India and a very middle class background and pursuing my American dream.

On the other hand, I became.

An insider because I could see why working on Wall Street that what do the easy money policies of the Fed or how does the government meant intersect with the economy and what are the consequences of all of that.

Well, you may have dropped out of a PhD program, My hunch has you got more than a PhD education working at Morgan Stanley because you were right in the middle of all this information flow.

Exactly.

I think there's nothing like being as fortunate as that, which is to sort of experience it as I said it was baptism by fire because one of my first assignments was covering the East Asian financial crisis, seeing what can happen to countries that take on too much debt over a short span of time, and then also seeing how American capitalism worked and then got distorted over time, just having a ringside view. And I think that it was a fascinating experience to see that over twenty five years and to still track it.

Well, if when you stick with India for a second, were you at all surprised by the recent national election in India.

Well, I can frankly say no, because what happens is that after the results had declared, everyone likes to say in some way I knew this would happen, or I knew that would happen, but luck But I had written a column with the Financial Times, with whom I'm a columnist, saying that how there is no movie wave in India. And the only reason I was able to do that, I think is that I've formed a group in India with about twenty of us, all writers and analysts deeply interested in the Indian election, and the twenty of us travel every time there's a major election in India, national or state to cover that election in India, and I had been in India in the early part of May for my thirty second election trip in India that I had done over the last twenty five years. And when the twenty of us traveled, we traveled coast to coast, starting from the east to the west, over two thousand kilometers. My sort of takeaway was the fact that there is no way for the leader there. They're in the remode, and instead this is Indian democracy functioning. That people are just keen that there'd be some opposition, that they were getting a bit fed up of the one sided narrative coming out of India. So I think that this is true democracy at work at a time, and there's so much talk of democracy being in decline around the world, I think that what Indias served up earlier this month was such an encouraging.

Sign for all of us who are.

Great ambassadors or great believers in democracy around the world.

You've had, in a sense since the early nineteen eighties, both a economic liberalization in India and the development of a very robust political system with a lot of competition within a great point framework. At the same time, it seems to me, since you came to America that we've seen a real decline both in our belief in the economy and our belief in the government. I mean, how do you measure that exactly?

So I think that's what really got me sort of started on this book project with as they said that in the pandemic, the government's response in terms of both the severe lockdowns and then using stimulus in an indiscriminate way to paper over the lockdowns in a way I think, you know, like it's something which got me really alarmed. And then I looked at some of the data coming out at that same point in time from the polling data, and that had me really concerned. The fact that most young Americans, particularly Democrats like you know, by a pretty significant majority, would be telling the pollsters that they would rather have socialism over capitalism. That's like such a telling statement that here is this country which is synonymous with capitalism, and we have these young people in America saying to us that they would rather have socialism over capitalism, and the other polling data all kept backing it up. The fact that today in America, only thirty five percent of Americans feel that they can be better off in their parents. Very different from fifty odd years ago when seventy to eighty percent of Americans felt that they could be better off than their parents. The fact that faith and government, as you pointed out, is close to a record low, and that most independence even in this country, forget Republicans or Democrats, most independents in this country who don't have any partisan angle, they think that the economy is headed in the wrong direction. All that data, and that data continues even today, even though we have fully recovered from the pandemic as far as the economy is concerned. In some way, the fact that that data all keeps pointing in this grim direction is really what sort of led to his book, because it's really a deep investigation what happened. How did so many Americans lose faith in capitalism? Why do so many Americans feel that they cannot be better off than their parents? So this book is in many ways an examination of that that what happened and what really caused this, and how do we get out of here?

From your perspective, prior to Roosevelt in the nineteen thirty two election, we had really been outside of big wars a country of very limited federal government, and then under Roosevelt that began to change, and under Lyndon Johnson had changed even more, and then under Obama and Obiden we have really become a country with a much bigger government than any of the founding fathers expected. Do you think on balance that that approach has worked or has that increased the economic and political problems of the American people?

Well, I think that it's definitely increased the problems of this people, as evidence by the fact that even though the role of government has expanded, and the role of government has expanded in a multifaceted way. It's not just government spending as a share of GDP, it's the regulatory regime, the bill culture, the micromanagement of the business cycle, the size of the bureaucratic state. They've all expanded consistently over time. And I think that the fact that we are spending all this money and the government's getting more involved, and what's the result been so far? The faith in government is at a record low. Two.

We have had much greater.

Increase in inequality in favor of the entrenched and the top one percent, if not the top ten percent. And also I think that this is something which is much less spoken about. Over the last thirty to forty years, we've seen a big decline in productivity. That productivity growth has fallen significantly in America and even more so in Europe, which is even more status than America. Productivity growth has fallen significantly over the last thirty to forty years. And as you know, the single most important determinant of economic growth is productivity growth. So productivity growth is falling, then there's just less of the pie around for people to from. And that is a serious problem for most Americans.

From your perspective, do you think that's reversible or do you think that we're inevitably now trapped into a system of limited economic growth and government control.

Well, unfortunately, I think that if I go back again to my experience of India, that when do countries really change or even in the last ten twenty years, which countries have truly changed their path, Countries only changed their path when there is a very apparent crisis. Until there is a very apparent crisis, even though the problems are quite insidious out here, I think that most people you know, just carry on the same path. Okay, that's how it is. So we just keep going down that path, and policymakers keep on doing what they have done. The natural sort of response is status cooism, because they don't think that they have much incentive to carry out any big radical change.

So I think that that's the big concern for me.

But the idea of this book is not to sound all gloom that this is the path we're on. As I said, the first step to occur is to let's diagnose the problem, because today my big concern is that most solutions involve even more government intervention. But the government needs to intervene this the government needs to break down companies or intervene more in this sector or that sector. And I'm trying to sort of say, but that's what got us in the mess in the first place. So let's at least diagnose the problem correctly. And then I do have a whole chapter in the book speaking about where capitalism is still working, leading with countries like Switzerland, which is the richest country in the world today and also one of the top ten happiest.

Countries in the world. What's working there.

The size of government is much smaller than any other European country, and even the United States, their regulatory environment is a lot friendlier, their small and medium sized business creation is a lot more robust than that of America.

We have to expand on that for a second, because historically Americans thought of Switzerland as being much more socialist than we are.

Exactly, but I think that most people will confuse that with the entire European continent, and in Europe that are many models which are working. So I think that most people in America think which as socialists tend to think of the Nordic countries, Sweden is I think one of their favorite countries that they speak about, and as they show in the book, that we have to understand what Sweden did and where Sweden is today.

Sweden was one.

Of the most socialist countries at one point in time, but even Sweden had a big economic crisis if you recall in the early nineteen nineties, and after Sweden had that, Sweden has been reversing course. Sweden has cut back its government spending as a share of GDP. Sweden has also been running fiscal surpluses for many of the last twenty five years or so. So I think people have to cherry pick the details that suit them and they see a static picture that, oh, these Nordic countries still spend a lot more than we do, and they're happier than we are. But I think they overlook the fact that they also got into trouble because of overspending.

They have course corrected.

They're running budget surpluses or close to budget surpluses now, and so it's very different. Switzerland, I feel, just falls between the crack. A lot of people just sort of say, who cares about Switzerland. It's too small. No, it's among the world's pretty largest economies, a bigger size, I think than even Sweden today.

So let's look at the relevant examples.

There are many stories in Europe, not just one story with lots of layers. In Switzerland, I think is a very different case than Sweden. And Sweden, which is also a favorite of the liberal economists, is a country that reformed and was forced to cut back it's endless states spending and start to run budget surpluses.

We are very far from that situation.

You also mention that one of the major challenges for modern capitalism is that governments are increasingly ill equipped to keep up with the accelerating pace of technological change. I was preteicularus to this, as I just had lunch with an expert on a large scale computing and artificial intelligence and a variety of things involving communications, and the scale of change coming down the road across the board, from space to artificial intelligence to biology. It's astonishing. And yet your point, which I think is right, is that these large bureaucracies are both hostile through regulation and find it extraordinarily difficult to adapt because of the very nature of bureaucratic behavior. What's the long term solution to that?

Yeah, I think that.

You know, we need to redesign the state for the twenty first century. The problem today with the government is that it just keeps on taking more and more responsibilities, including on legacy things, without knowing that how do you prioritize like for example. Therefore, I've been so against this Biden's Industrial policy for one, which is that this is the kind of stuff that countries followed in the sixties and seventies. It worked in a couple of instances. In most instances, it did not work. So why are we following policies from the past which have a very selective history of working, if at all. And that in today's day and age, we need to put our resources more towards the more effective use of technology, towards more effective distribution of welfare benefits. And as I said, there are countries like Singapore, which I go back to, where the state is very modern, very technologically adept. The other country I speak about in my book a Lot is Taiwan in that same chapter of where Capitalism is Working. And in Taiwan's case, their states spending as a share of GDP is nearly half that of America, just twenty percent or so. And yet Taiwan was widely praised in terms of how it dealt with the pandemic because how efficient it takes savvy the state was. So the whole point being that you can deal with a lot of the problem you have if the state is right size and the state's priorities are correct. But if you overload the state with far too many responsibilities, some dating back to the fifties and sixties and some sort of you know, like adopting outdated policies, the state will be suboptimal in delivering anything. And I think that that's where it is, which is that the state's doing a lot, and yet each thing is like so inefficient. I mean, you know, just at a personal level, I hear this all the time that you know, for example, we have the TSA now, which is one of the biggest employers in government and government bureaucracy something new, and yet the experience at the airports or any of those things is about as bad as it's ever been, right because we've got so many people doing that. I think the numbers are there, about fifteen percent of the regulatory staff is in the TSA. They have what sixty thousand employees and stuff like that. It's just crazy in terms of you know, what the government is expected to do and like you know what the results are. So I think that just you know, like the fact that the bureaucracy has grown so much, their budgets learn so much, you know, Like is the fact that this is not a state were building for the twenty first century when technology should be allowing us to do a lot more with lot less.

Part of the theme I've been trying to work on is instead of figuring out how to artificial intelligence to the current bureaucracy, so we ought to be asking ourselves, in an age of massive capabilities, how should we be reshaping government in order to achieve better outcomes at lower cost with greater effectiveness, which is very different than asking how you could apply artificial intelligence to improving marginally the current system.

Absolutely correct, Yes, absolutely correct.

So the concept I speak about in the book is a term which has been used I think a bit in a few circles. It's called quoalit crisis, which is that when you're dealing with multiple crises at the same point in time, then how does the government prioritize right in terms of what to do and in terms of the fact that what tools you know, what should we be due to prioritizing things that the government should be doing. And so I think that that's like a section that I think that you'll find very relevant.

And maybe your next book is to try to think in a positive way about the shape of the government we should have rather than the government we do have.

Yes, I do have.

A last chapter gets into that, which is that the only way out is through is how I've titled it, and the last chapter gets at that.

But as I said, the unfortunate thing new it is the.

Fact that until and unless you have a crisis, which forces everyone's attention to address it. People rarely do that until then they keep on doing what they're doing, or doubling down. I mean, we are currently doubling down on our debt and deficits compared to what we used to have. I mean, there was a point in time when in the late nineties when we briefly ran surpluses. But the last fifty years we've run a budget surplus for only five or the last fifty. In the preceding two hundred years, we ran a budget surplus for almost all the time, except in the middle of a war or a depression, and then we thought that, Okay, running a budget deficits, fine, it's investing.

In the future.

That used to be about three percent of GDP for much of the last twenty years. Now we're running a number which is six to seven percent of GDP in terms of that. So we're just like, listen, as long as there's no crisis, keep at it.

Well, I have to say that with some immodesty, that I'm very proud of the fact that the only four consecutive balanced budgets in your lifetime were launched when I was speaker.

Yes, I've pointed it out in the book.

If you could wave a magic wand and balance the federal budget. What would you do?

It has to start with getting spending under control, because I said that spending the share of the economy has gone from three percent of GDP one hundred years ago to nearly forty percent of GDP. Now, we need to slow that down in terms of that. So I think that balancing the budget the first step has to be getting spending under control, and obviously entitlement reforms stuff which seems to be off the political agenda across the isle.

Today you have a very interesting and very front cover, and you have four presidents, and you have a red line through all four. Explain the cover. I mean, I think it's a fascinating cover that's going to get a lot of attention.

Yeah.

So the cover really has the four presidents beginning with FDR, Nixon, Reagan, and Biden.

And my point is.

That this expansion in government that's taken place which has distorted capitalism, has happened throughout history. It started with FDR and has been doubled down by Biden. And for me, the most surprising thing was that even Reagan, such an iconic figure someone I grew up idolizing, but when you look at the data that even under him, government spending as a share of the economy kept on going up. He cut taxes, but really couldn't do much about getting spending under control. And similarly, if you look at the number of regulations, even those went up under Reagan. So my point was that many things that we thought Reagan was great at, and you know, he was such a great communicator, his speeches and his rhetoric was so refreshing at that point in time, but if you look at the actual track record, there was no real small government revolution under in him. So the cover just captures the fact that no matter who's been an office, virtually the last hundred years, we've had this steady expansion of the state, and we've got into a position now where the damage being done by that is incredible.

You could argue that one hundred.

Years ago the state was too small, we needed some welfared and stuff, But now we're at a stage where the state has just expanded and encroached, and it's there in every part of our life without us even being fully conscious of it. The fact that America introduces three thousand new regulations a year over the last twenty years and they've withdrawn twenty regulations in total over the last twenty years. What are we doing here in terms of because by doing that, we are stifling small and medium sized businesses and giving an undue advantage to the entrenched and the big businesses who can both afford to comply with these regulations and also write these regulations given their incredible lobbying part in Washington.

Rouchair, I want to thank you for joining me. Your new book, What Went Wrong with Capitalism is available now on Amazon and in bookstores everywhere. I think it's a must read book for lawmakers on Capitol Hill as we continue conversations about how to get back to a strong economic growth and a balanced budget. And I really appreciate your sharing these ideas with us.

Thank you, newt I really enjoy chatting with you.

Thank you to my guest Routschier Charman. You can get a link to buy his new book, What Went Wrong with Capitalism on our show page at newsworld dot com. Newtsworld is produced by GANGUA three sixty and iHeartMedia. Our executive producer is Guernsey Sloan and our researcher is Rachel Peterson. The artwork for the show was created by Steve Penley. Special thanks that him had Ganglish three sixty. If you've been enjoying Newtsworld, I hope you'll go to Apple Podcast and both rate us with five stars and give us a review so others can learn what it's all about. Right now, listeners of Newtsworld can sign up for my three freeweekly columns at gingwishwree sixty dot com slash newsletter I'm nut gingrich. This is Newtsworld.

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