The Prof G Pod with Scott Galloway - Interest Rates, the US Economy, and Demographic Change — with Matthew Klein

Episode Date: June 29, 2023

Matt Klein, the founder of The Overshoot, and the co-author of “Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace,” joins Scott to discuss the macro environment and why a recession isn’t imminent. Matt also shares how to think about the demographic shifts we’ve seen across various nations. Follow Matt on Twitter, @M_C_Klein.  Scott opens by discussing the attempted mutiny in Russia, shedding light on the power dynamics and ramifications for various players on the geopolitical stage. Algebra of Happiness: are you floating?  Learn more about your ad choices. Visit podcastchoices.com/adchoices

I just don't get it. Just wish someone could do the research on it. Can we figure this out? Hey y'all, I'm John Blenhill, and I'm hosting a new podcast at Vox called Explain It To Me. Here's how it works. You call our hotline with questions you can't quite answer on your own. We'll investigate and call you back to tell you what we found.

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credit cards. Head over to nerdwallet.com forward slash learn more to find smarter credit cards, savings accounts, mortgage rates, and more. NerdWallet. Finance smarter. NerdWallet Compare Incorporated. NMLS 1617539. Episode 256. 256 is the area code serving parts of northern Alabama. 1956, IBM invented the first ever hard disk drive. And America's first modern shopping mall

opened in Edina, Minnesota. I don't understand how parents can lose their kids in a mall. Seriously, any tips greatly appreciated. Go, go, go! Welcome to the 256th episode of the Prop G Pod. In today's episode, we speak with Matt Klein, the founder of The Overshoot, a premium subscription service dedicated to tracking the global economy. We discussed with Matt the state of play regarding inflation and the financial markets, trends playing out across the global economy,

and his thoughts on economic and financial impact of demographic change. Oh, my God. That just sounded so highbrow. I'm not a primitive, heavy-browed, I don't know, arrested adolescent prof with erectile dysfunction who will be starched from the gene pool if people have their way. No, I interview people with subscriptions, financial products that understand global markets. What's happening? What's happening? We witnessed a historic weekend. Yevgeny Prigozhin, the leader of the Wagner Group, essentially leading a mercenary army of somewhere between 25,000 and 50,000 people, turned direction, turned around and

decided he was going to march on Moscow. And the most shocking part of all of this was that Rostov-on-Don, he was welcomed, even cheered on. This has revealed Putin as being exceptionally weak and also that his grip on power was a lot looser than we had thought. It also brings to light how much nuclear weapons matter, that you can be a gas station posing as an economy, but if you have 10,000 nuclear warheads and a reputation for having your enemies fall out of windows, you carry a much bigger stick than you deserve. broadcaster wrote on her Telegram channel, the choice was between bad and monstrous, a series of decisions around bad decisions. Ukrainian President Zelensky said, the bosses of Russia do not control anything, nothing at all, complete chaos. Putin says he let the mutiny take place as far as it did to avoid bloodshed. President Biden says,

we had nothing to do with it. This was part of a struggle within the Russian system. They're keeping probably appropriately quiet. If there's a train wreck of your enemies, just stay out of the way. Our favorite geopolitical expert, Ian Bremmer, writes, it undermines Putin's ability to govern, requiring greater state control of the population with the attendant surveillance and further mobilization required to enforce it. I just can't. I don't think anyone saw this coming.

Supposedly our intelligence apparatus knew something was up or that Provozhin might be planning something. But this illegal invasion, although I would argue almost any invasion is illegal, this invasion has been a total disaster. It's hard to imagine a world leader that has fallen further faster than Putin over the last 14 months. First off, the invasion just didn't go very well and isn't going well. And two, his mercenary army, he doesn't appear to have control of it. And he had to call on someone he doesn't have a lot of respect for, Lukashenko, the Belarusian president, to step in and negotiate a resolution. And what will happen with this resolution? You got to think that Prokofhin's days are numbered. Without an army taking his command, I don't know how he

doesn't end up in jail or dead. Or it strikes me that, hey, here's your new corner office, and it has a big window, and it's on the 11th floor. I can't imagine that this individual is going to be sleeping very well at night. It also just shows that Putin is a paper bearer, if you will, that sitting on a lot of oil and putting in place a series of kind of mini criminal gangs that he controls through fear, no real ideology, no real prosperity other than the prosperity concentrated among a few elites, so to speak, in Russia. This was just a very weak foundation that is collapsing fast or appears to be collapsing fast. Also, a real shout out to all the people on the far right and all the Putin apologists and sycophants who said that we should

negotiate with Putin and that we had to face the reality of the war and the strength of the ferocious Russian army, they could not have been more wrong. And the U.S. administration, in conjunction with its allies overseas, and obviously on the front end, the heroic valor of the Ukrainian army has just, has absolutely sent a signal to the world, including China, who probably had designs on invading Taiwan, that when the West binds together, our weapons, our strategies, our technology, our communications, our resilience, our ability to cooperate and bind together are unrivaled. The other winners here, I would argue, are India, who has been able to garner very cheap oil by playing the West off against Russia,

and what looks like a GDP run that might rival or at least have echoes of China's economic run over the last 20 years. But the nation that people aren't talking about as much, that has grown its economy faster in the last year than any large economy, the Kingdom of Saudi Arabia. And here's the reality. They sit on trillions of dollars, tens of trillions of dollars in oil reserves. They have pivoted from Islamism and terrorism. It used to be a cold war with Iran and a hot war with Yemen. And MBS has pivoted to capitalism, which is the kind of the gangster economic construct and the way to exert influence. Well, how does that influence exerted everything from bringing the most famous soccer player in the world to the kingdom to hosting the world couple that was Qatar. It's regional,, you're going to see a massive,

a massive migration of human capital to Riyadh. When I was in Riyadh a couple months ago, I was struck by how many people, talented people from Asia and Europe had moved to Dubai and were now moving to Riyadh because a decent strategy for economic security is to find the biggest pile of money and stand as close as you can to it. And the biggest pile of money in the world right now is in Riyadh. We are spending about $550 billion on our infrastructure act here in the U.S. or over there in the U.S. I'm in London today. And when I was in Riyadh, some officials took me through seven projects that are above a trillion dollars each. I mean, they're building a city, Neom, which in comparison, they want Dubai to feel like a small, cute village. I mean,

they have unbelievable ambitions because here's the bottom line. They have about 30 or 40 years to pivot. Why? The good news is they sit on the Pacific Ocean of oil. The bad news is it's going to run out at some point. So they have three, four, five decades to pivot to a non-fossil fuel-based economy, education, tourism. They're trying to get big into the gaming industry, entertainment, services. And they are saying, all right, this is the good news. We have an unlimited supply of capital, but the bad news is we have to get out of our existing business. And this notion that we're going to wave our finger at them and lecture them, okay, a vocal minority will do that, and then 98% of the rest of the world is going to decide to work with them. I think we should restore relations

or we should absolutely give a big bear hug to India and also normalize relations. And we do, we don't like to say this, but we have actually military bases in the kingdom, but encourage more commerce between the two nations because these two nations are going to play an increasingly important role. And China fucked up here. They bet on the wrong cowboy, specifically a cowboy that runs around on a horse with his shirt off. But quite frankly, underneath that facade of masculinity is a guy who's remarkably flaccid and losing power. This is a wonderful moment for the West. We are standing with our brothers and sisters in Ukraine. Our economy is still relevant. Who the hell is doing better than the U.S. right now, geopolitically? This really has kind of a reasserted U.S. hegemony, and that is we are still the leader. We are still the free

leader. We are on the side of the righteous. We fuck up all the time, but the arc of America bends toward justice. This is a wonderful moment for us. No one could have seen this coming. We had our own insurrection, but I would argue it was mostly a few thousand crazies who were whipped up by Fox and a corrupt criminal president. But you don't see Northrop Grumman or the Navy marching towards Washington, D.C., threatening to overthrow the government with weapons, for God's sakes. I mean, this got very scary, very fast, or very strange, very fast. But again, to sum it up, go USA.

This is a wonderful moment for the West. We should feel proud of ourselves. In America, we love to raise a generation of young people who don't like America. But guess what? Guess what? This matters. And this was handled really well by the U.S. and her allies. This is a great moment for us. We make the best weapons. We have the best intelligence. We back the right horses. And we aren't afraid of a murderous autocrat just because a bunch of people on the right or libertarians, so-called libertarians, think we should negotiate and be an apologist. No Neville Chamberlains in this administration.

We'll be right back for our conversation with Matt Klein. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, And how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Support for this show comes from Constant Contact. You know what's not easy?

Marketing. And when you're starting your small business, while you're so focused on the day-to-day, the personnel, and the finances, marketing is the last thing on your mind. But if customers don't know about you, the rest of it doesn't really matter. Luckily, there's Constant Contact. Constant Contact's award-winning marketing platform

can help your businesses stand out, stay top of mind, and see big results. Thank you. you create and send the perfect email to every customer and create, promote, and manage your events with ease, all in one place. Get all the automation, integration, and reporting tools that get your marketing running seamlessly, all backed by Constant Contact's expert live customer support. Ready, set, grow. Go to constantcontact.ca and start your free trial today. Go to constantcontact.ca for your free trial. Constantcontact.ca. Welcome back. Here's our conversation with Matt Klein, the founder of The Overshoot and co-author of Trade Wars Are Class Wars.

Matt, where does this podcast find you? I'm in San Francisco. Nice. So unprecedented velocity and rate increases over the last five, six quarters. Give us your thoughts on the state of the markets and sort of unintended consequences and second-order effects of these rate hikes. So the context here is that basically since about 2008, 2009, you've had interest rates being very, very low. And you have a whole half-generation or so of people, consumers and businesses and

investors being used to this low rate environment. And there are a lot of reasons why interest rates were low and that made sense at that time. But people built up a whole set of expectations about what was normal, what they should be, you know, what was sort of the range of possible outcomes. And then very quickly, you have a very sharp disruption to those expectations. And interest rates move, you know, in the grand scheme of things, you look at like a long-term chart of interest rates, you think 5 percentage points, maybe not that much. But, you know, zooming in on the past 15 years or whatever, if you're used to, you know, the short-term interest rates, you know, the cash or whatever being essentially zero. And, you know, even at the

longer-term interest rates, maybe not going above 3 three it's sort of the upper end and then suddenly everything is about five that is going to have a really big impact on a lot of people um this isn't the first time that's happened by the way uh you can go back to like the 1960s you have a similar dynamic of a lot of businesses you know for a very long time used to you know interest rates just didn't go very high and then as inflation started to build in the 1960s, before oil shocks or anything like that, that put upward pressure on interest rates. It put pressure on banks that had made all these loans at 6%, and they took deposits at 3%. And you can read reports in the time on how much trouble they were getting into. And so that adjustment is going to be challenging. I mean, the good news is that, you know, as was the case then and, you know, as is the case now, I mean, a lot of other parts of the economy are doing

relatively well. So there are going to be losses. I mean, clearly we've seen, you know, some banks having those issues, but at the same time, you know, job growth is still pretty robust. Wage growth is still reasonably healthy. There hasn't been a huge reliance on borrowing to fund consumer spending in the past few years compared to previous expansions. It really has been coming much more out of either income growth or money that had been saved during the pandemic. And stocks have been, you know, compared to the peak at the end of 2021, kind of flat, right? But flat is a lot better than, you know, down substantially. I mean, so I think in that sense, there is a sort of recognition that there are these big countervailing forces here. There's some big losses for some individual sectors. But so far, it seems that things are sort of, you know, muddling through, even if, you know, a few particular banks have gotten overextended and getting blown up. So it feels as if we were a month away from recession for the last 18 months.

And yet as we sit here, unemployment at historic lows, the real estate market has been shockingly strong. The markets, as you've pointed out, seem somewhat resilient. Is this the recession that never happened? Or do you still think we're looking at a recession sometime later in the year, 2024? What is your—recognizing no one has a crystal ball here, what would you—where would you put your money right now? Yeah, I mean, that's a great, great question. I mean, if you think—if you look back to right before the Federal Reserve began raising interest rates, the expectation that they had, the expectation that was priced into markets, is that they would maybe raise interest rates by, you know, two percentage points over the course of 2022. And they ended up doing almost five percentage points. And, you know, one might have thought, if you'd known at the beginning of 2022, what they actually ended up doing relative to what people thought was, you know, reasonable expectation, you think, wow, that's going to really tank the economy. And yet that's not what happened, as you said. So, you know, I think this gets back to the question of,

normally the way that channel is supposed to work is that if you make borrowing more expensive and you make it more attractive for people to just hold cash in a bank account as opposed to, you know, buying things that create jobs and income, that that's going to slow the economy down and that's going to have all these attendant effects. And yet, that doesn't seem to really have had the impact, even with the housing market, which is the most obviously sensitive interest rates, and your mortgage rates going from below 3% to almost 7%. And that did have a notable impact on house prices in some areas are down, housing activity in terms of new construction has come down substantially. And yet, it seems like we've already found the floor. You look at the data from May, the most recent month we have, and it already seems as if, you know, home sales and home construction are picking up again. And it suggests to me, I mean, you know, again, there was this sort of big, painful, one-time reset, but people have managed to sort of get through it because underlying wage growth is still strong. There wasn't that much, I guess there wasn't that much, you know,

reliance on borrowing. You know, if you compare this to say like 2005, 6, 7, 8, there you had a situation where so much of consumer spending was dependent on people borrowing against rising home values. And so as soon as that was no longer possible, you had this downward cascade very quickly. That wasn't really the case this time around. You had this big cash injection from the federal government as a consequence of, you know, responding to the pandemic and trying to make sure that we didn't have a financial crisis because we all had to stay home in the first months of, you know, 2020. And then people saved money from that. The economy recovered. You had,

you know, more cash injections to really turbocharge recovery. And then at that point, you had a pretty healthy situation where, you situation where the economy isn't fully normalized, but it mostly gotten back to normal. And then people have the extra cash that's available. And that seems to get the results that they want. But, you know, to your point, I mean, to the extent that you might think that, oh, we're going to have a, you know, economic downturn, it seems like this has really been preventing that and all the things, the channels you might be worrying about for a downturn, you know, I mean, obviously, you know, things could happen, you know, the Fed might decide they want to, you know, keep squeezing, but their ultimate priority is to get inflation back in a line. And if they think inflation is going to come back in a line without the economy going into a downturn, they're not going to, they have no interest in overdoing it. You know, that's where it gets really kind of a tricky question is,

you know, can that happen? So we had what I think will be described as this pretty serious geopolitical shock, even if it ends up, I mean, I remember this past weekend, it's just like, I just don't think anyone was prepared for what happened or went down in Russia. Have you thought through what kind of the direct impact or the second order effects on the markets might be? Well, what happened this weekend is really an interesting question because I'm not even sure we know exactly what happened and, you know, whether it's even over uh in that sense so uh i think you're zooming out a little bit what's interesting is that as the war has progressed and you know obviously it's been extremely disruptive to people who live in ukraine um and a lot of ukraine's neighbors but you know things you know the sort of that initial shock people have managed to adapt in various ways um you know the you know energy markets got rerouted, food,

you know, there was also helpful that, you know, there was a very good harvest in place like Argentina and Australia and the Southern Hemisphere, wheat producing countries. But in general, there was a degree of which after that initial shock thing, you know, sort of passed the worst. You know, that surprise happened. Once you have the surprise, that's what matters for markets, the surprise. But once it's happened, you know, the surprise is over. I mean, it's still obviously very destructive. It's terrible for the people who live surprise. But once it's happened, you know, the surprise is over. I mean, it's still obviously very destructive. It's terrible for the people who live in Ukraine. You know, obviously, you'd want the war to end soon.

But that, you know, and the impact on markets seems to sort of stabilize there. And one of the things that's sort of always a possibility once the war started is what would the impact be on Russia internally? I mean, the specifics of what happened this weekend might have been very surprising and unanticipated, but I mean, the idea that you start a war that ends up being relatively unpopular domestically, and because it doesn't end the way you expect it to, you have to conscript a lot of people, you have a huge wave of emigration, it doesn't seem to be going the way you want it to, the idea that that creates some kind of instability at home, that in and of itself is not inherently surprising.

It's just a question of how it plays out. And then, you know, who ends up winning? What kind of conflicts are? What the next person would be like? I mean, that kind of possibility presents itself. You see this. I mean, it certainly wouldn't be the first time in Russian history that you're fighting someone else and then it goes badly and then there's a revolution at home. So, obviously, what happened this weekend didn't play out the way it didn't say 1905 or 1917 but

you know that possibility sort of created itself as soon as the the war started and so you know looking ahead the question is well is it more likely that something like this will be successful in the future and if so like who would be the kind of person to take over and what would that mean i mean that's where it gets i don't know if we've learned anything new in that sense. And that's really what, you know, what the impact for markets is like that risk was always there once the war started. And so that's sort of my initial perspective. But again, we don't even know exactly what happens. So, and it will work if it's over. So that makes it challenging. So we think of it, switching gears, we think a lot about sort of population implosion or depopulation or more specifically how ideally we should create more opportunities for young people such that they can afford should they choose to have children.

You've actually spent a decent amount of time focused on how demographic change affects societies, politics, markets. Can you say more about what is playing out in the U.S.? Sure. So getting some sort of little historical perspective here is that after, you know, basically after World War II, you have a big increase in populations and particularly populations of young people, the baby boom, you know, in the U.S., in Europe, and in much of the world, in Asia. And that process more or less peaked around the 1970s in terms of the child boom and the share of younger people and the total population. And since then, we've had basically a shift as that cohort ages, the population of, you know, what we conventionally think of as working age people, you know, sort of 20s to 60s, depending upon, you know, where you draw the exact cutoff, peaked as a share of the total in a lot of places sometime around, you know, either the 90s or 2000s or 2010s, I don't

know where exactly you're looking. And if we use sort of standard population forecasts from places like the United Nations, which, you know, if you figure who's already alive, you can do a pretty good sense of what, you know, who's going to be alive in the future, more or less, you know, based on, you know, trends in life expectancy. And you say, okay, well, it looks as if the share of people who are going to be within this prime working age is going to be falling as a share of the population in a lot of places. The share of people who are over the age of 65 or over the age of 70 is going to be rising a lot in a lot of places. The share of people who are under the age of 15 is going to be rising a lot in a lot of places. The share of people who are under the age of 15 has been falling and is probably going to continue to fall pretty substantially in a lot of places. And then the question is, what does that mean

for society and for markets and everything else? And the first thing to say is that there's a lot of variation depending on where you're looking. So the more extreme cases are places like China, certain parts of Europe, where you're actually going to see outright population decline, and particularly outright population decline for people of sort of what you think was the working age. So if we take the UN forecasts seriously, the number of people in China age, you know, 20 to 65, 20 to 70, is going to fall by something around half between now and the end of the century. It's already been falling and it's going to fall, which is, we've not seen something like this before. You look at a place like the U.S. actually, it's relatively more benign. I mean, part of this is sensitive to forecasts

about immigration and things like that. But, you know, in principle in the U.S. you're going to see a situation where the total population will rise a net, a lot of it's going to be elderly, but you're still going to, the absolute number of people and sort of the twenties to sixties cohort is going to be rising small, you know, flat rising either way though, you're going to have some distributional challenges because in every society you have a situation where there's some people who are producing more than

they consume. So essentially people who are working and then you have people who consume more than they produce, which are, you know, children, elderly, the disabled, things like that. And so, you know, that's fine. That's what living in a society is. But obviously, if you have a big change in the balance between, you know, one group versus the other group, that's going to create some challenges in terms of, well,

how are you going to distribute the cost of the lower living standards? Because if you have a situation where everyone is, or lots of people are net producers, then, you know, the workers can retain a lot of what they produce, they can consume a lot, and the people who are dependent on them can also live very well, because they're a relatively small, you know, burden or whatever. On the other hand, if you have a situation where you have a relatively small share of people who are doing most of the production, then that creates, you know, some challenges. That having been said, it doesn't necessarily tell you the outcome. You look at Japan, I think it's really the only real example we have of a country that's already sort of gone ahead with this demographic transition, or at least, you know, they're further ahead in the process in a lot of other places, and give you a sense of what, you know, one way of dealing with it. And I think that actually is a very healthy model that we should, you know, decent that we're going to see that our Europeans are going to see

that or what have you. I think that's very encouraging, which is they ended up just increasing the share of people with jobs. You know, they historically had relatively low share of women in the paid employment workforce. And that's changed a lot, very dramatically in the past 10 years. You also have a situation in Japan where people, you know, partly this is a function of fact, they have a high quality health system and generally, you know, healthy lifestyles, but people are able to be working in productive members of society and in paid employment, you know, increasingly longer. And, you know, the extent that one of the problems we've seen in the US and in Europe and elsewhere of people who are older and no longer in paid employment, a sense of loneliness uh or you know they're not they don't have things to do i mean that's actually you know

could be a very constructive solution um and so you know how it all plays out i think is very sensitive on you know what the specific you know social institutional contexts are in each country and you know but it's really i think it's, you know, has to be thought of and something that we can choose to do well or do poorly. But I mean, you know, it's definitely going to be, I think, a major theme. The good news is that these are slow moving changes, but it's definitely going to be a major theme, I think, you know, in the decades ahead. So given the shifts in the global economy, where do you see opportunity from an investment standpoint? That's a very tricky question. Uh, I mean, yeah, I mean, you know, there are lots of places, I mean, you know, having long ago worked, uh,

an investment briefly, I mean, the trick is what is already priced in versus what you think. So you can say, oh, this is going to be a great opportunity, but if the market's already discounting that, or, you know, more than discounted, then you're not going to make money doing that. So that's very challenging. Um. I think it was late 2021 or very, very beginning of 2022. There was some, you know, report that was put out of, oh, you know, it was a really undervalued market is Russian stocks. You know, they traded a very, very low P ratio. Turns out that there was, you know, didn't know why, but it turns out that there's a reason for that, right? If you had bought Russian stocks, then you think, oh, they're cheap, but then they got a lot cheaper. So I'm relatively optimistic about the U.S. economy right now, actually. But whether that translates into very good returns on buying U.S. assets right now is, I think, sort of a different question. I don't have a view on that angle. But I do think, actually, there are a lot of reasons to be optimistic about the U.S. I think we've been seeing, aside from the fact that sort of the macro picture is overall healthy where you don't really have this issue of, you know, consumer debts and electronics and things related to the green transition you have. It looks like a big increase in equipment investment for things

related to that as well. And so I think, you know, and it's really only just getting started, I think. So that, I think, is another reason to be relatively optimistic. Turning that into investment is a different story, but, you know. We'll be right back. Hey, it's Scott Galloway. And on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions.

What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life.

So, tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts. Hello, I'm Esther Perel, psychotherapist and host of the podcast, Where Should We Begin, which delves into the multiple layers of relationships, mostly romantic. But in this special series, I focus on our relationships with our colleagues, business partners and managers.

Listen in as I talk to co-workers facing their own challenges with one another and get the real work done. Tune into Housework, a special series from Where Should We Begin, sponsored by Klaviyo. We spend a lot of time talking about inequality. Do you think the problems surrounding inequality are overstated, understated? You write a lot about it. Yeah, so, I mean, yes. So, first of all,

I do think inequality is actually a serious issue. I think it's also a serious issue, not just from like the social perspective or sense of fairness or what have you, but also, I think, macroeconomically significant. You know, I wrote a book with Michael Pettis called Trade Wars or Class Wars, and that was a big part of the thesis was that changes in the income distribution or the big increase in inequality that we've seen over the past several decades actually had these really severe macroeconomic effects and explains a lot of the problems that people associated with trade and globalization and that one of the perverse consequences of this was that we had situations where people in many countries were blaming

foreigners for things that actually were really um you know they were on the same side essentially that you know as we were in the book that you know the typical person on the same side, essentially, that, you know, as we wrote in the book, that, you know, the typical person in the U.S. might think that the typical person in China was someone taking advantage of them, but actually it was the opposite. It was that the typical person in the U.S. and the typical person in China had very similar interests and were being taken advantage of by, you know, elites in both of their countries who were effectively working together against them. And so that, I think, is a very serious issue. That having been said, I do think that, at least in some places, the past couple of years have actually been somewhat helpful, sort of counterintuitively.

I remember in the beginning of the pandemic, there was a big concern about this. And I remember sharing that concern that, you know, because of who was suffering from job losses and, you know, what the nature of what could be done from home versus not, that you had the situation where inequality was going to get worse and there'd be this huge, you know, all of the negative trends of basically saw since the eighties were going to be reinforced and exacerbated. And yet that doesn't seem to have happened. And I'm not, I'm not entirely sure why, um, I think there's a variety of factors. I think it depends on what place you're looking at. Um, but certainly in the U S one thing that's really interesting is that economists

have just been looking into this and that people in the lower half of the income distribution have actually seen the biggest real income gains. And that there has been a real compression in wage inequality,

which I think is a very healthy development. I think it's one of the reasons why the economy, at least particularly in the U.S., the consumer spending has been relatively robust and hasn't depended on credit growth to the same extent. I mean, we saw credit card debt fall. It's come back a bit, but it's still sort of below where you would have expected naively based on the pre-pandemic trend. I think the interesting

question is, is this sort of a one-off shift or is this sort of part of a sustained, persistent change in the trend? But I think that could be, you know, a potentially healthy development. I think globally, if we look, there's like still plenty of room for improvement. I think one of the things that's disappointing is the Chinese government's reaction to the pandemic, where essentially they did not provide any kind of income support to people who were affected. In the beginning, there was no real unemployment benefits whatsoever. You had tens of millions of people who'd been living in the cities returning to the countryside as essentially become subsistence farmers. And that had knock-on effects there of very, very weak consumer spending in China

basically over the past several years. And so I think that's a serious problem for them and by extension for people in the rest of the world. But I think at least in some places in the U.S. and I think possibly in, you know, Europe as well, we've seen sort of the beginnings of what might be called a healthy rebalancing. So I'll put forward a series of theses and you tell me where I got it right or wrong or what you disagree with or agree with. The U.S., relatively speaking, hasn't been this strong since the end of World War II,

relative to its competitive set. I think that might be right. I mean, I think one thing that's, you know, in general, when people talk about the size of the economies and, you know, it's the U.S., the biggest in the world, I think that's not really, I think that in some ways is like too narrow of a view. People say, oh, is the U.S. economy bigger than the Chinese economy or what have you? And it's like, that's not really how it would play out in the grand scheme of things. You really want to look at like, what is the broader set of countries that are you know allied and friendly with each other and if you think about that and there are different ways of defining it but like the u.s alone is certainly in a very i think relatively good position but certainly if we think about the u.s and you know canada and europe and aust and Japan and Korea and all that, like that's a very large block and is by far the dominant block economically in the world. I think we've seen

with the impact of the way the sanctions on Russia were imposed. I mean, the Russians were, I think, very surprised that the Europeans and the Asian democracies were willing to go as far as they did. I think that was sort of their strategy based on what happened after 2014 was that if anyone were to do anything, it would be the U.S., but otherwise no one else would. And I think if that is what had happened, then they would have been fine. But that's not what happened, and I think we're seeing the impact of that. And so there are other large economic economies individually

if you look at country by country, but individually, if you look at like country by country. But I think if you look at sort of these broader blocks, I think that the, you know, the global alliance of democracies, they said there is a sort of cohesive, you know, the G7 plus is, I think, very strong. I think people now say like, oh, well, you know, it's still weak compared, you know, people talking about the rise of China. And obviously, China is a very large country. It's a very, it has some very sophisticated technology companies there and diversified manufacturing base but at the same time if people think about i think there's a little bit of historical amnesia about what people were saying about the soviet union say the 50s and 60s where i mean that was a society that

created that was ahead of the u.s in the space race you know you know the people talking about the sputnik moment i mean that was that was what it was was that was actually significant advances relative to what you know we were able to at the time if you think about the relative population sizes and relative economic way it's actually that the soviet union was at the time considered a very serious you know pure competitor threat and i think if we're thinking about it from that kind of comparison, I don't, yeah, I think that the democracies now are in a very, you know, strong shape, obviously not cause for complacency or anything, but also you don't need to be, I don't think one needs to be necessarily alarmed and, you know, fear of, you know, losing one's status or primacy,

I think is also something that, you know, would be unnecessary given some of these relative power balances. And so greatest self-inflicted wounds geopolitically, I think most people would say it's probably been Russia's invasion of Ukraine. But I would argue number two would probably be Brexit. And I know you've written about Brexit. What are your thoughts there? Yeah, I completely agree. Brexit was totally unnecessary uh there was a really good paper that was written a few years ago that i i remember writing about when i when i found it and what they did was the um they were looking at the change in the share of votes for the uk independence party which doesn't exist anymore but basically that's like a pretty good predictor of who later ended up voting for Brexit. And it turns out that within the UK, the places where you had the biggest increase in share for UKIP are the places that had the biggest cuts to social services during the period of austerity after David Cameron and the Tory Lib Dem coalition came to power in 2010.

And so there was actually a very, very clear relationship between, you know, the financial crisis happens, this new government comes in, they think the big problem is that the government budget deficit is too large, the government debt is too big, and they're going to try to cut back as much as they can. And they really cut back the most on local government support services, things like, you know, mental health or social housing, stuff like that. And so, you know, he did some basic simulation of like, well, what we sort of imagine what would have happened if there hadn't been these cuts there hadn't been the that increase in ukip and the extent of the increase in ukip predicted the brexit vote share which it did pretty well like what would have happened and remain would have

won quite handily so brexit i think was a large mistake in the sense that i don't think they've gained anything i think most people in the uk you look in the sense that I don't think they've gained anything. I think most people in the UK, you look at the polling, say they don't think they've gained anything really meaningful. A lot of the substantial majorities say that they wish they had some kind of closer relationship with the EU than they have now. Not necessarily to rejoin, but, you know, I think I saw recently it was like 70% want some kind of closer connection than what they have now. So I think that was definitely a mistake. And I think it's interesting that that was very much tied into the sort of macroeconomic policy mistake of you have this financial crisis, this extremely disruptive event, lots of people thrown into work, and the response is, we're going to cut back on government support for a lot of people who really need it. And to varying degrees, you saw that kind of mistake in lots of places. In the UK, I think it was among the more severe, and that's how it manifested itself. You see that in Europe. You saw things like that happen in the US as well. I mean, it's just, I think that was really, people wouldn't have thought of in the context of geopolitics. But I think that was all, I mean, that was a horrific mistake. And the 2010s, in many ways, were a lost decade that was self-inflicted as a result. A horrific mistake. Matt Klein is the founder of the Overshooter, a premium subscription service dedicated to tracking the global economy, and the co-author of Trade Wars Are Class Wars, A Rising Inequality Distorts the Global Economy and Threatens International Peace.

At the beginning of his career, Matt worked in global macroinvestment research at Bridgewater Associates. Following this, he was a research associate in international economic and financial history at the Council on Foreign Relations. He joined us from his home in San Francisco. Matt, we appreciate your time today. Thank you very much for having me. Algebra of happiness, are you floating? I spent a year of my life just kind of floating. Actually, I think I spent several years. The first time was right out of UCLA. I got a job at Morgan Stanley in the two-year analyst program. And then I got out and I didn't feel like I had the grades or I didn't have the confidence to apply to business school yet. So I was living with my mom and I just wasn't

doing a whole lot. I was just sort of floating, didn't know what I wanted to do. And then again, when I moved to New York after, I think it was 2000 after the dot bomb implosion, and I was trying to get my life back together, floating a little bit, but at least had some purpose. It was just taking a while to get going. But that year after kind of 24 to 25, I was sort of floating. And if you're floating, I think you want to take advantage of the fact that there are some amazing organizations such as the Peace Corps that offer an opportunity that while you're trying to figure things out, you can do something in the agency of something bigger than yourself, which is a decent, I think, definition of purpose. And I also think that's true of the armed services.

I've kind of come full circle in the armed services. I used to think that that would be a terrible thing for a young person. And having been exposed to now a number of veterans and people in the armed services, I know a lot of young men and young women who, quite frankly, are floating. And then they go into the armed services and they find purpose and meaning and connection, and also AmeriCorps. I think it's a decent idea if you're a young person and you find yourself floating for one, two, or three months to take advantage of some of the amazing organizations that our federal government offers where you can serve in the agency of something bigger than yourself. Are you floating?

Are you floating? There's options out there. This episode was produced by Caroline Shagrin. Jennifer Sanchez is our associate producer and Drew Burrows is our technical director. Thank you for listening to the Prop G Pod from the Vox Media Podcast Network. We will catch you on Saturday

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