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June 27, 2024 - The Charlie Kirk Show
33:47
How the Government Is Ruining Capitalism
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Hey everybody, what went wrong with capitalism?
We discuss with Ruchir Sharma.
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The question about capitalism comes up more and more.
What Went Wrong With Capitalism?
That is the title of a new book.
I'm really excited for this hour.
Ruchir Sharma, New York Times bestselling author, Financial Times columnist, chairman of the Rockefeller International, and author of the newly released book, What Went Wrong With Capitalism?
So many dimensions to be able to explore here.
Ruchir, welcome to the program.
Tell us about your book.
Thanks, Charlie.
So I was motivated to write this book during the pandemic when I saw the kind of stimulus that the governments in the West, in particular America, doled out.
It was unprecedented.
We had never seen this kind of fiscal, monetary stimulus, credit guarantees, bailouts.
that were done during the pandemic. And that sort of helped me think through this, that what have
we come to here? Is this really the system that we have currently? Can we call it capitalism?
Or it's become so distorted now that it is beyond anything that its founders had in mind. So the
book is really a deep examination of what went wrong with capitalism. And why I say it went wrong
is because of the fact that today, if you look at the polls, most young Americans, particularly
Democrats, say that they are not going to vote for the new government. And that's a fact.
Say they would rather have socialism than capitalism.
That's such a big statement for people of this country in America, which is always seen to be synonymous with the capitalist system.
For them to say they would rather have socialism than capitalism just tells you how disaffected people are with the current economic system.
And yet I think there's a mislabeling of it, that they're calling it capitalism.
As the title of my book goes, that capitalism did not fail, it was ruined.
And the examination that I did I love that.
So let's get our terms right.
shows that progressively every decade, the role of the state, the role of the government
has expanded in such a way that what we have today is a distorted form of capitalism. So
that's what this book really does. In a way, it's an ode to capitalism, but it tells you
that why the capitalism we have in its current form is not working for the average American.
I love that. So let's get our terms right. Let's first say, how would you define capitalism
for our audience? Everyone would give a different answer.
Is it absence of any government intervention?
Is it a preference on private property rights?
Freedom of markets?
What is your working definition of capitalism?
For me, that's a great question because I begin the book that way, which is I begin my book by the fact that I was born in India and I moved here more than a couple of decades ago, but I was born in a socialist country.
And what sort of struck me in India was the fact that people there were given political freedom rather early, but they were not given economic freedom.
So for me, the soulmate of capitalism or the key to capitalism is giving people as much economic freedom as possible.
Which means the freedom to decide what they want and a sense that they have an equality of opportunity.
I think that's another key definition of capitalism.
It's about equality of opportunity.
It's not about equality of outcomes.
There will be inequality in capitalism because capitalism is supposed to reward The big winners.
Yes, I understand that.
But there needs to be a sense that there's an equality of opportunity.
So for me, the two key definitions of capitalism is people having as much economic freedom as possible.
And secondly, in terms of the fact that them having a sense that they have an equality of opportunity, even though conceding that the outcomes may be unequal, but those are driven by meritocracy and not So that is very helpful.
And I believe that there is no such thing as either or political or economic freedom.
You just have freedom.
One must have the other or else you don't live in a free society or a free country.
So now let me ask you another question, make sure we define our terms.
Then what would you describe, what label would you describe what we're currently living through?
It's not capitalistic, it's something different, something else.
What term would you use?
So the way I describe it in the book is that it is socialism in a way for the rich, but I'd say more than that, it's socialized risk, which is that risk has been socialized.
I think that's the key part here.
Everybody, whether it's got to do with the rich, it's got to do with the middle class or even the poor, a sense that no one shall bear any risk, that everyone is going to be protected by the government in some form or the other.
There is no cleansing effect.
There is no pain that anyone's allowed to endure.
So I would say that what we have today is a system where risk has been socialized.
Yeah, and a great example of that is Silicon Valley Bank.
Absolutely.
Talk about that, please.
Yeah, because that's something which I mentioned in the book, that every time we have a crisis in this country, there is a sense that if we don't act, we will have another Great Depression.
And the history here is so important.
If you don't mind, I can step back here and put this in context as to how far we have come over 100 years, where last year, at the first sign of trouble, the government was out there trying to bail out a bank that catered mainly to rich depositors in Silicon Valley.
A hundred years ago, it was the opposite.
The impulse of the government was to do absolutely nothing.
That approach seemed to work in America right up until 1929 when you had the Great Depression.
Now, a strength taken too far becomes a weakness.
We had the Great Depression because we ended up in terms of You know, try to liquidate that cycle as that famous term went off the Treasury Secretary back then, which is that liquidate, liquidate, liquidate.
And that became a pejorative term because it led to the Great Depression.
But now we have Silicon Valley Bank at the other extreme, where one mid-sized bank of rich depositors is about to go bury up for mistakes they made.
And the government feels compelled to intervene.
And the fear is that if they don't intervene, you'll have another Great Depression.
So that's the kind of like 180 degrees that we have come and the analogy I use in the book here that it's a bit like the same culture of pain management that for every small injury the people here want to administer some sort of an opiate like Oxycontin or something.
So what happens is that you get hooked into having opiates and you have an opiate crisis.
I think the economic system has now come to resemble something similar, which is that every time
there is even the slightest pain, we want to administer government stimulus
or some form of government support.
And so we have become totally hooked now to having constant government support and relief.
And that has serious consequences.
In the book, as I detail, the single most serious consequence of this has already played itself out, which is the fact that productivity growth in America has fallen from 2.5% or so, which we averaged for a very long period of time, to now barely 1%.
So productivity growth in America, and much of the Western world for that matter, has collapsed in the last three or four decades.
As we have destroyed the creative, destructive fiber of this economy.
That is so deep, and we see a deeper societal illness that manifests economically, where we don't want any sort of pain, any sort of difficulty, so we must turn on the money machine almost immediately.
The book is very smart for the entire hour.
It is What Went Wrong with Capitalism by Ruchir Charma.
And you mentioned that capitalism was ruined.
Yeah, so as I said that in terms of that, you know, we tend to look at just government spending as a share of GDP as an example of the expanding role of government, you know, and that's expanded significantly from 3% of GDP in the 1920s, right up to nearly 40% of GDP now, massive expansion.
In the book, I speak about how capitalism has seen now a culture of bailouts which never existed before, the number of regulations being instituted by government every year, the micromanagement of the business cycle, the mission creep of the US Federal Reserve.
All those elements have come to play.
Every decade, those things have come to play and nothing has been withdrawn.
And so therefore, we have such an expansive role of government today, which is corroding, I think, capitalism at its core.
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Ruchir, you were talking about one element of your very important book, What Went Wrong With Capitalism, How Capitalism Was Ruined.
Please continue.
Yes, so as I was saying, Charlie, that if you look at the culture of, like in America, and I add the analogy to the pain management one, Which is that every decade, if you look at it, the role of the government has increased.
So one very important aspect I'm going to speak about here is this culture of bailouts.
One thing which, frankly, even for me was surprising as I was researching for this book, was that America never believed in bailouts.
That right up until the 1970s, if some company got into trouble, or even if some New York state or city got into trouble, the sort of Attitude of policymakers was fine, figure it out on your own, this is America, we don't bail out especially private sector companies out here.
And there were a couple of bailouts tried in the 1970s and there was a lot of pushback from Washington on bailing out private sector companies.
And then in 1984 you had the first big bailout really of a financial institution here which was Continental Illinois.
And that started, I think, this culture of bailouts.
After that, it's got bigger and bigger.
Then you had the savings and loans crisis.
After that, you had the LTCM in 1998.
Then, of course, the global financial crisis, the banking crisis of 2007-2008.
Then the pandemic.
And then, as we sort of said, that even something like SVB, the government feels compelled to bailout.
So we have gone from one extreme to another with no culture at all of bailouts
to now the culture where we've got to bail out every company at the slightest hint of trouble.
And the precedent that sets is very dangerous because then the average American feels
if that rich company or that big cat is getting bailed out, Why am I not getting more assistance?
Why am I getting laid off or why are my wages not rising so sharply?
Why is the government spending billions in that explicitly or implicitly?
So that leads to this sense of unfairness and also this culture of bailouts has led to a lot of deadwood being kept alive in the economy.
One of the aspects I get into the book is the zombification of capitalism, which is that the number of zombie companies in America today is very large.
What is a zombie company?
It's a company that for three years in a row has not earned enough money to even cover its interest payments or service its debt.
So it's forced to keep going back to the market to raise capital and so the number of zombie companies in America barely existed again in the 1980s.
Today by some measures 20% of all companies in America listed are
classified as zombie companies. Now this is a term that became popular in Japan in the 1990s. The
American media including the New York Times and all were sort of lamented saying that Japan does it but
no in America we don't do this kind of stuff and here we are today with nearly 20% of American
companies that can be classified as zombie companies. So these are the consequences of this
bailout culture and of protracted policies which are of easy money that the Fed pursued that we have
so much dead wood floating in the system Yeah, and so, is it too harsh to say that you cannot have it both ways?
You cannot have a prosperous, capitalistic society or framework without allowing companies to fail and allow companies to have to go through difficult periods.
It seems as if we want it both ways.
We want prosperity and zero opposition or difficulty.
Ruchir?
Exactly.
So capitalism doesn't work with just on the upside and then on the downside, we're going to socialize all the risks.
As a quote I use in the book, that capitalism without bankruptcy is like Christianity without him.
Right?
So that's really what it comes down to, which is the fact that if we want capitalism, then we have to allow risk to be taken.
Because by not doing so, we have to also understand what the adverse consequences are.
That's what I try and say in the book, that a lot of people, You know, speak about the debt and deficits and the crisis hasn't come about despite all the fair mongering about debt and deficits.
And I say, yeah, that's one aspect of it.
But what about the decline in productivity that's taken place?
What about this feeling where most Americans think that the system is rigged and the system needs to be torn down and they're not happy with the economic direction in which the country is moving?
So I think we have to recognize that the average American is not happy with the system.
That's what's feeding also this anti-establishment Hey everybody, Charlie Kirk here.
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I want to now ask you about the four faces on your cover.
FDR, Nixon, Reagan, Biden.
Was that just a coincidence or were they put there intentionally?
Well, I think they were put there intentionally because, as I said, that the book starts all the way, you know, with the battles between Hamilton and Jefferson and stuff.
But really, it's a history of capitalism over the last hundred years.
And I think that these are four very significant figures over the last hundred years.
Like about FDR, I think that everybody would agree that he obviously started the expansion of the state in a pretty significant way.
Nixon also did a lot to intervene in the economy.
And Biden, of course, has completely taken it to a different level in terms of the expansion of the government under him.
I guess the more provocative figure, like there is Reagan.
And why I chose Reagan was because of the fact that I grew up as a big fan of Reagan because I thought that he gave America much more economic freedom and brought them back from the brink in the 1970s when the economy was engulfed in taxation.
But a closer examination of Reagan's track record really suggests that he did not slow down the increase or expansion in government.
He changed the way it was financed, which is that Before the 1980s, America would rarely run a budget deficit.
After that, Reagan did cut taxes, fair enough.
But then, he did not do anything to restrain government spending that kept on going up under his watch as a share of the economy.
And eventually, even some taxes went up when he was in power.
And even the regulatory state kept on increasing.
So a closer examination of Reagan's track record Suggests that he was not somebody who brought in any revolution in small government as the people today like to portray him as, but really someone who was very much part of this expansion of government that has carried on on a relentless basis over the past century.
So I want to talk about the role of the central bank, because we've been talking mostly on the fiscal side, but I want to talk on the monetary side.
What role in your book do you give the central bank in ending American capitalism, or at least ruining it or destroying it?
I think that's played a very significant role, but it's very much part of the holistic picture, as I said, about pain management.
So if you look at the role of the central bank, there are two or three things worth pointing out.
One, again, very significant event that took place was back in 1987.
What happened then?
We had the big stock market crash in October of 1987.
And then a Reagan appointee, in fact, Alan Greenspan, Cut interest rates to try and rescue the stock market.
That was a very significant move there because it really sort of meant that the central bank was telling you that on the way up, you can go out and party and make as much money as you want.
On the way down, if the market crashes, we'll be there to rescue you.
And the term which became very popular, if you may recall from that era, was the Greenspan put.
This idea that That he or the Fed would always be there to protect the downside.
And on the upside, they'd make some noises about irrational exuberance.
But on the upside, the entire focus was that we have no idea whether this is a bubble or when to intervene on the upside.
So we restrict our intervention to the downside.
It led to this perverse outcome where for the markets it became very much almost a one-way street and risk was socialized.
And after that we've seen the expansion take place much more dramatically.
Most controversially was the actions during the global financial crisis where the Fed intervened heavily in the markets.
It did something called quantitative easing.
But to me, Even if that was justified, because even in the midst of a crisis, what was far more troubling, and I've documented that in the book in detail, was what it did in the 2010s.
That long after the crisis was over, the central bank kept on buying assets, kept on driving financial markets higher.
And it did so by explicitly saying that it wanted financial markets and asset prices to go higher because there would be a wealth effect felt in the entire economy.
Unfortunately, that wealth really concentrated in the hands of just a few people,
particularly like the billionaires and the people at the top.
And once again, it led to this feeling of inequality feeding through the entire economy.
So the role of the central bank too, has expanded significantly from not just managing
in terms of consumer price inflation, but in terms of how it interacts with financial markets,
its mission creep, and that its involvement runs very deep.
There are some arcane sections of the market, like what happened to the repo market in 2019,
which a lot of academics have written about.
Once again, the Fed's hand was all over it.
And obviously in the pandemic, the Fed was incredibly involved
to the extent it was buying corporate paper of AAA credit, such as even Berkshire Hathaway
at the height of the pandemic.
And it once again showed the fact that the Fed, you know, boosted asset prices,
boosted the wealth of a few at the top.
And most Americans did not feel those benefits.
They only felt that they're being priced out of the market because one of the big things that I think Americans feel
about today at a common person level is the way property prices have risen.
That's become so difficult for the average American now to buy a home just because of the way property prices have inflated.
And a lot of the property price inflation very much has to do with the Fed's easy money policies of the last 30 to 40 years.
So, I completely agree with that.
And what it does, unfortunately, it creates people who blame capitalism for their financial uncertainty and difficulty when you're arguing it's not actually capitalism at all, which is totally correct.
And so, if you were to put forward a policy agenda to go about solving this, what would that look like?
Well, first again, as I say in the book, the first step to a cure is to diagnose the problem correctly.
So by laying out this history, backed by data, backed by these anecdotes that I've cited in the book, the first thing is to bust the myth that the Biden administration and other people have put out there that we're in an era of small, or we had been in an era of small government, and here we are to change that and to increase the role of government to fix all your problems.
And so the first thing is, let's bust that myth.
We have never had an era of small government The government has been expanding as a continuous march over the last hundred years or so, and that has accelerated only in the last three to four decades.
So there is no case for a bigger government when the problems have already been caused by too much government.
And if you look across the pond in Europe, we find that the problems are even more severe there because capitalism and state interference have far more distorted capitalism out there.
So that's the first point to understand.
But as far as some of the fixes are concerned, I fear, Charlie, that unless and until we have a physical crisis where the government literally runs out of money to do any of this, or its credibility is such where it's not able to guarantee and do these kind of bailouts, the government will just keep on doing what it's been doing.
If it has to stop somewhere, I'd say one of the most important things, and this is where I hope that someone like President Trump pays more attention to, is the Regulatory state.
Even he came to power promising that we have to change the regulatory burden and for every regulation we introduce, we will withdraw two.
Instead, by the end of his term, the number of regulations that were introduced were as many as the Obama administration had done.
So I'd say that that's something which I wish he would sort of deal with in a more disciplined way, that we need to reduce the regulatory burden in this country.
The average American is feeling that.
You know, I stumbled upon again some very interesting research as part of my book, which I put in there, that as per some research, the average worker spends 16% of his or her time dealing with Legal compliance courses, attestations, or other sort of courses at work which are merely complying with regulatory requirements.
Can you believe that 16% of the time that an average worker spends goes in that?
That is enormous and that's such dead weight for the economy.
by some estimates that's cutting productivity growth by half for the average worker
when they're spending 16% of their time just doing these kinds of courses, which are such a burden.
So I think that one big fix that the American economy needs is to dial back this regulatory state
with 3000 new regulations being introduced every year over the last 20 years.
And the total number of regulations that have been withdrawn
20 in total over 20 years.
Rishir, the book is What Went Wrong With Capitalism.
And it's an amazing thing when you talk about regulation, despite a pledge to get rid of the regulation,
it just seems to continue to grow.
And part of the problem is.
...is the administrative state has become a law-making body.
When it was never supposed... I mean, never supposed to be that way.
The administrative state shouldn't exist in its current form at all.
The process of which federal regulations are drafted and then put into effect is unconstitutional and it is... it is very... it is at odds with free market capitalism.
The Chevron deference decision is something that we got to keep our eyes on.
Very much so.
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So Ruchira, I want to ask you, do you have hope that American capitalism can be saved?
I remain very optimistic on the long-term prospects of America just because it's still the country which everyone wants to come to, right?
As that old sort of slogan that I used to remember, when people used to protest against American occupation anywhere abroad, they used to say, Yankee, go home, but take me home with you.
So I still feel that that is something which is there.
But having said that, I am very concerned about what's going on today and very concerned about the way that the state just keeps on expanding and what it has done to undermine The American brand of capitalism and how the average worker is feeling so disaffected in America today.
So I think that yes, it can be saved.
But the first step to a cure is to diagnose the problem correctly.
And that's what I've tried to do in the book, which is to show that what really is the problem?
Why is productivity growth so low?
Why do only 35% of Americans today feel that they're gonna be better off than their parents
compared to the original concept of the American dream, when 70 to 80% of Americans felt
that they'd be better off than their parents.
So I'd say that we need to get the balance back.
Now, while there may be no going back to 19th century-type laissez-faire capitalism, but we need to get the balance back.
And the balance back needs to start with the retreat of the regulatory state, drawing the line on bailouts, caring more about asset price inflation, such as the increase in property prices, and also not running these debt and deficits until we hit the Day of Reckoning.
If we continue to borrow money at the current trajectory, it is remarkable.
I want to just follow up on one thing.
Did you say American productivity is going down?
Is that what you said?
Yes.
Productivity growth in America used to be two and a half percent three or four decades ago.
It has fallen over the last decade.
No, I have to just interrupt because we're running out of time.
Help me understand, with artificial intelligence and more technology, how are we becoming more inefficient?
very concerning and we've seen the effects in Europe.
Now I have to just interrupt because we're running out of time.
Help me understand with artificial intelligence and more technology,
how are we becoming more inefficient?
I don't understand that.
Yeah, it's counteracting that, right?
So which is that you have technological progress, you know.
So the way to frame the question is that despite this incredible technological progress, including the internet in the late 1990s, now AI, why is productivity growth not Picking up, why is it going down?
Now remember, the very good comparison is here, that in Europe, productivity growth is even lower than that of America.
That's because Europe doesn't have the technological prowess that America has.
So yes, the technology we have is helping us at the margin, but it is not being able to offset the drag coming from increased government intervention and the role of the state, which is corroding capitalism as a whole.
So I think that the whole picture needs to be looked at, that these are different moving parts.
If you were to say, in the last 50 years, in the post-World War II era, where American capitalism was most alive and was at its healthiest place, when would that be?
No, I think it's been a steady deterioration.
So that's my point, that there's been no point in time.
I think it's been a steady deterioration that's taken place now.
under place, you know, like I'd say in the 1980s and 1990s, we did see some, you know,
like in terms of restraint under Reagan, we saw some spending restraint and the only time
we've run budget surpluses was in the late 1990s. You know, when the last 50 years,
there have only been four years in which America has run a budget surplus.
Before that, in the previous 200 years, America almost always ran a budget surplus.
So I'd say that I can point to those eras which were relatively better, but this is a constant march of the state which has undermined capitalism over time.
It's in the book.
In fact, I have a whole chapter On where capitalism, I think, is still working well.
And my Exhibit A there is Switzerland.
It's among the top 20 economies in the world.
It is the richest country in the world today by per capita income terms.
It ranks amongst the highest in the world in terms of economic freedom and also the fact That it's government as a share of its economy is smaller than that of the United States.
So it's possible to have this trifecta of being one of the happiest countries in the world, one of the richest countries in the world, and yet having a state that is well managed and efficient And small rather than something which is overburdened.
So I'd say that those examples are great.
I can get on board for Switzerland.
I think it's one of the greatest countries in the world.
Ruchir, thank you so much.
Great book.
Everyone check it out.
What Went Wrong with Capitalism.
Thank you so much.
Thank you.
Thanks so much for listening, everybody.
Email us as always freedom at charliekirk.com.
Thanks so much for listening and God bless.
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