3 Takeaways - What’s Ailing Capitalism, and How to Heal It (#218)

Episode Date: October 8, 2024

Serious doubts about capitalism are being raised these days, and for good reason. Too many people are being left behind. But is capitalism really failing? Is socialism the answer? Ruchir Sharma, Chairman of Rockefeller International, says capitalism is being ruined by the expanding role of government. Is he correct? Listen and decide for yourself.

I'd like to begin this podcast the same way my guest today begins his book. And I quote, today in America and many wealthy countries, people are agitating against the excesses of modern capitalism, widening inequality, dominant monopolies, and big corporate bailouts. They are drawn in their frustration to more government intervention or socialism as the answer. But is it? Hi, everyone. I'm Lynn Thoman, and this is Three Takeaways. On Three Takeaways, I talk with some of the world's best thinkers, business leaders, writers, politicians, newsmakers, and scientists. Each episode ends with three key takeaways to help us understand the world and maybe even ourselves a little better.

Today, I'm excited to be with Rushir Sharma. He is chairman of Rockefeller International and a contributing editor at the Financial Times. His work has also appeared in the Wall Street Journal, Foreign Affairs, The Atlantic, The Guardian, Bloomberg View, and Foreign Policy. He has thought a lot about what enables countries to be successful. He was born in India, emigrated to the US, and has written several bestselling books, including Breakout Nations, The Rise and Fall of Nations, The Ten Rules of Successful Nations, and most recently, What Went Wrong with Capitalism. Welcome, Rushir, and thanks so much for joining Three Takeaways today.

Well, thank you for having me, Lynn. Thank you. It is my pleasure. Rushir, you believe that the debate over how to fix capitalism needs to start with a clear understanding of what went wrong in the first place. What went wrong with capitalism? Capitalism did not fail. It was ruined. It was ruined by government. The ever-expanding role of government is what has ruined capitalism. If you look at the last few decades, every decade you find that the government's role in some way or the other has increased, not just by increased government spending or increased government debt and deficit, which today has become very large, but also by the suite of habits, the amount of regulation

that the government puts into place, which hampers small and mid-sized businesses. By the culture of bailing out companies, especially big companies, under the guise that this is a modern form of trickle-down economics, that if you don't help the big companies, it's going to ruin the life of the average person by micromanaging the business cycle. I think all these suite of government habits today have become endemic, and this is what is ruining capitalism and moving capitalism away from its founding principles. So what does capitalism look like when it's running, in your words, correctly? It's very hard to come up with what correctly means, but it's definitely

wrong today if two-thirds of Americans feel that countries are headed in the wrong direction. It's definitely wrong today if most Americans today feel that they can't afford a home or be better off than their parents. It's wrong today if most young Americans today feel they'd rather have socialism rather than capitalism. So for me, capitalism now needs to get the balance back, which is the government's role has expanded enormously over the last few decades, and yet the trust in government is at record lows. So we need the government role to dial back for America to return to some of its founding principles of limited government for people to, to some of its founding principles of limited government

for people to, I think, get better outcomes. Because there's only that much the government can do to spend out here and to try and fix everyone's problems. If you try and do too much, you'll end up doing nothing. Just like we give people political freedom, I think economic freedom is a soulmate of political freedom. So capitalism should work at its basic level by giving people as much economic freedom as possible. And you need some regulations as well. What we're doing now isn't the slightest hint of any trouble. We just want to spend as much as it takes, give as much in terms of guarantees and giveaways

as it takes. I think that balance needs to be restored. How do you see government intervention in financial markets? And how has that distorted capitalism? Two very significant things happened in the 1980s, in fact, which was otherwise seen as the start of this golden era of market fundamentalism, as some people put it. But instead, two things happened quite to the contrary. One was in 1984, you got the first big bailout of a financial institution in the United States of Continental Illinois. Before that, it was considered heretical for any government to intervene to bail out a private sector company. In the 1970s, it was tried a couple of times. There was a lot of pushback. In 1984, finally, the dam broke. Once that happened,

then it set a precedent where every time you had any trouble in the banking system, in the financial system, you were always looking for the government to intervene. That got bigger and bigger to other sectors as well. So I'd say that was a very significant moment in America's history. The second thing in terms of directly with financial markets also had to do with 1987. We had the big stock market crash in October of 1987. And for the first time, the central bank then, the Fed, under Greenspan, explicitly intervened to prop up the stock market. And that came to be known as the Greenspan put, which is this feeling emerged that the Fed would always be there to protect losses on the downside, whereas on the upside,

there was nothing to restrict the gains. So you almost had a system where you could capitalize the gains, but the losses would be socialized. So I'd say that those two things played a very big role in distorting financial markets and distorting the incentive system in the financial markets that when you know that the government or the Fed's always going to be there to protect the downside, I think it leads to a very different type of behavior on part of investors when they have that assumption. And especially when on the upside, the approach of governments is that, yeah, the upside, it's fine. We don't know how to predict when something is getting too bubbly or

too excessive. So the upside, you can ride it completely, but the downside, we're here to protect you. So you talked about the government intervening for the first time to protect private companies. Can you talk more about creative destruction and why you see that's a problem? What we have seen in America is that if you look at the various sectors, and this is not just true of technology, but various companies, what you have is that you feel that in more and more sectors, the same companies are becoming increasingly dominant. Now, capitalism at its heart is supposed to encourage new companies from coming. If any company is making a supernova profit, as we call it in economic terms, or excessive profits, those profits over time are supposed to be competed away by new companies coming and fighting for the same pie.

And that's healthy, that you keep getting churned, you get new companies which are formed and which come. Instead, what we've seen in America in the last few decades is that the same companies that were dominant have become increasingly dominant. And the concentration in various sectors, from beer companies to coffin makers and technology companies and the modernity companies, you find there's increased concentration among the top three to four companies. And the other thing which I find quite telling from this point of creative destruction

is that right up until the pandemic, if you looked at the number of new startups in America, those were declining. On the other hand, the number of zombie companies in America was increasing. Zombie companies are companies that have not even made enough profits to cover their interest payments for three years in a row. They're forced to keep going back to the market to borrow and stay alive. They're on a constant drip of easy money and easy access to capital to stay alive. And if they don't have that, that's a problem. The number of zombie companies in America, by some definition, has increased from just 2% of the total number of listed companies in America back in the 1990s to nearly 20%

now. The problem with that is that if you keep alive so much of deadwood in the system at the bottom, and you have increased concentration of companies at the top, you squeeze out a lot of companies from entering the middle segment of the market. And I think that that's what has become the problem of American business and maybe of even the American consumer

or even a sense of, for the average American, capitalism is not working. It's been too dominated by the large companies at the top or then all this debt would be kept alive by artificial stimulus and easy money at the bottom.

And by letting companies fail, that creative destruction, if you will, then enables new companies going to allow exits to happen? And so if the pace of exits has slowed down, by definition, the pace of new entrants is going to slow down as well. So capitalism, remember, is always going to lead to increased inequality. Now, the extent may be much greater than what we had anticipated, but inequality is supposed to reflect meritocracy, that some people will do well, some people will not do well. The problem we have in America today is a feeling of inequality of opportunity, that not everyone feels that they have an equal opportunity in such a system where

the government always seems to be favoring the incumbent, the existing big businesses, rather than sort of helping new entrants come into the system. And you believe they're doing that through bailouts, through excessive government spending, and through keeping interest rates really low. Yeah. And more than that, I also feel due to regulations that, you know, like, I think this is one of those very fundamental concepts out here, which is that regulation tends to be pro-incumbent and pro-big business. Because if you look at the cost of regulation, it's gone up exponentially over the last few decades.

The number of new regulations that the government institutes every year has gone up significantly. There were 3,000 new regulations the government's been putting into place over the last 20 years or so, and they've withdrawn only 20 in total the consequence of that is that that just keeps so many of the existing businesses alive because they are the ones who know how to navigate the regulatory system and the barrier to entry for new business becomes very high. So I think that regulation is something which ends up being pro-incumbent and pro-big business by definition, especially at the pace at which we are putting regulations today and the cost of it on state support. Can you put into perspective U.S. government spending and the deficit

and how it compares to historic deficits? Government spending in the US, if you look at this total state plus local plus federal, has been increasing continuously since the Great Depression, I would say. And now it's approaching nearly 40% of GDP. And apart from maybe a few years, such as in the Clinton years, when you had the boom, you know, that government spending as a share of GDP stabilized, even declined a bit. But otherwise, it's been a continuously increased line over time. And what changed during the Reagan years, I think, was that, contrary to popular belief,

even under Reagan, government spending as a share of GDP increased. Except what changed was that then that's when financing the spending through running budget deficits became the habit rather than tax hikes before that. So they cut taxes, but government spending, the share of GDP kept increasing. Now, today what's happened is that if you look at the difference, the budget deficit, as they call it, that's increased to 6% of GDP. There is no other major nation in the world, in the developed world in particular, that's running a budget deficit as a% of GDP. There is no other major nation in the world, in the developed world in particular, that's running a budget deficit as a share of GDP of anywhere close to 6%. The average in the other developed countries is closer to 1% or so. It's the third highest of any developed country in the

world, trailing that of only Japan and Italy, and the current pace we will overtake even Italy by the end of this decade. So that's the path we are on. Several countries such as Greece and Italy have had debt crises. How does U.S. debt compare to other countries when there have been crises in these countries? Many countries would have already suffered a crisis by running these kind of debt and deficit numbers. What's different about America is, of course, the fact that it has the world's reserve currency. It requires other people to hold the US dollars because it is the reserve currency. And when people across the world are in a way because of its currency status forced to fund America's deficit by holding dollars and therefore buying treasuries. So I'd say that because America is the world's

reserve currency, it has a much longer so-called rope to hang itself. But I'd say that it's still a risk that if you run such numbers, you will eventually end up hanging yourself. But America's experience has been much more benign compared to what other countries have experienced when running similar deficit and debt levels. At least so far. So far, yes. That's the operative phrase. Back in 2008, the European Union and the US economies were roughly the same size. Today, America's economy is now one third bigger. What's gone wrong with Europe? I think capitalism is in worse shape in Europe.

Some of the problems are identified here from the zombification of capitalism, the regulatory culture that you have in Europe is far more stifling than what we have in America. So therefore, productivity growth in Europe in the core nations from France to Germany is much lower than what we have in America. Productivity growth in America has been declining for the last few decades. In Europe, the trend is even worse. So I think that the problems of capitalism we have in America today, from the zealousness to regulate the bailout culture, some of the easy money policies, that's worse in Europe today than it is even in America. So I think that's the problem in Europe, that capitalism is just plainly in worse shape. In 1990, India and China had similar average incomes. China's average income has grown much, much faster. Their average

income is now five times as large as India's at about $12,500 on average, as compared to $2,400. Why has China grown so much faster than India? I think one of the counterintuitive ones that you think of China as a communist state, and yet if you look at the amount of economic freedom that people in China got compared to India, it was far greater. China carried out some very major parts-making reforms in the 80s and 90s and even the 2000s,

which helped the economy grow at this incredible pace. They focused much more on exports. They hardly gave any welfare payments to their people. They asked them to go to find work. And the 1990s, to sort out their bloated public sector, they fired nearly 100 million people to make those organizations a bit more efficient. So I think that in a way, and it's the irony that China gave its people much more economic freedom than India did, even though India gave its people much more political freedom. And China was able to compete more effectively by becoming a far more export-oriented,

outward-looking economy than India did. Can you talk a bit about the Nordic countries, how they don't really look like what most people expect? We just look at very simple metrics, such as debt and deficits. And you look at countries like Sweden, there the government spending as a share of GDP kept on increasing in the 1980s and 70s. They had an actual crisis in the early 1990s, and they were forced to cut back

the government spending as a share of GDP, and they got very disciplined about running budget surpluses and budget balances, and they were very averse to running budget deficits. So they did what it took to course-correct, and also the fact that they are not as spendthrift as America in terms of running very large government deficits. So they change course and they don't run the kind of deficits that America runs now. I think that's a very important distinction that we don't quite make. I think that Switzerland is an underappreciated model.

What are the three takeaways you'd like to leave the audience with today? Capitalism is still humanity's best hope for economic and social progress when it is allowed to work freely. I come from a socialist country such as India, and that socialism is not the answer to our problems. India has moved away from that. And I believe that economic freedom is as important as political freedom. And that needs to be the guiding principle for us when formulating policy. Thank you. I very much enjoyed what went wrong with capitalism. Thank you. If you're enjoying the podcast, and I really hope you are, please review us on Apple Podcasts or Spotify or wherever you get your podcasts. It really helps

get the word out. If you're interested, you can also sign up for the Three Takeaways newsletter at threetakeaways.com, where you can also listen to previous episodes. You can also follow us on LinkedIn, X, Instagram, and Facebook. I'm Lynn Toman, and this is Three Takeaways. Thanks for listening.