Are bailouts the new “trickle-down” economics? Have government debt and deficits caused capitalism’s collapse—thus ending the American Dream? Ruchir Sharma is a well-known columnist for the Financial Times, the author of bestselling books Breakout Nations and The Rise and Fall of Nations, and an investment banker who worked as Morgan Stanley’s head of emerging markets for 25 years. His new book, What Went Wrong With Capitalism, traces the roots of current disaffection with our capitalist economy to unabashed stimulus and too much government intervention. Take an example: Sharma writes that the United States federal government has introduced 3,000 new regulations in the last twenty years, and withdrawn just 20 over the same span. He likens the Federal Reserve’s constant bailouts—under chairs appointed by presidents from both parties—to the opioid crisis, in which the solution created more problems than the pain it was designed to treat. Sharma joins Bethany and Luigi to explain how constant government intervention leads to inefficient “zombie” firms, higher property prices, housing shortages, massive inequality, and a historic government debt and deficit crisis. Together, they discuss the first step to a cure—a correct diagnosis of the problem—and how to approach the treatment without exacerbating the problems. In the process, they leave us with a renewed understanding of how “pro-business is not the same as pro-capitalism,” a distinction that Sharma says “continues to elude us.”
Are bailouts the new “trickle-down” economics? Have government debt and deficits caused capitalism’s collapse—thus ending the American Dream?
Ruchir Sharma is a well-known columnist for the Financial Times, the author of bestselling books Breakout Nations and The Rise and Fall of Nations, and an investment banker who worked as Morgan Stanley’s head of emerging markets for 25 years. His new book, What Went Wrong With Capitalism, traces the roots of current disaffection with our capitalist economy to unabashed stimulus and too much government intervention. Take an example: Sharma writes that the United States federal government has introduced 3,000 new regulations in the last twenty years, and withdrawn just 20 over the same span. He likens the Federal Reserve’s constant bailouts—under chairs appointed by presidents from both parties—to the opioid crisis, in which the solution created more problems than the pain it was designed to treat.
Sharma joins Bethany and Luigi to explain how constant government intervention leads to inefficient “zombie” firms, higher property prices, housing shortages, massive inequality, and a historic government debt and deficit crisis. Together, they discuss the first step to a cure—a correct diagnosis of the problem—and how to approach the treatment without exacerbating the problems. In the process, they leave us with a renewed understanding of how “pro-business is not the same as pro-capitalism,” a distinction that Sharma says “continues to elude us.”
Episode Notes:
Link to submit papers for the Stigler Center 2025 Antitrust Conference
Revisit “Is the Federal Reserve an Engine of Inequality?”, our previous episode on modern monetary theory or the claim that debt doesn’t matter.
Revisit “Capitalism After the Crisis,” Luigi’s article for Foreign Affairs (2009), where he outlines the tensions between a pro-capitalism and a pro-business agenda.
Also, check out ProMarket.org, our publication at the Stigler Center that he founded in 2016, with the mission of shedding light on this tension and how to ameliorate it.
This podcast is dedicated to discussing what's working in capitalism and what isn't
>> Speaker A: The reason you have the opioiate crisis, many people argue, is because of this culture where the slightest hint of any pain you administer people Drugs and Medicine, OxyContin or whatever that same societal approach has now come to be as far as economic policy making is concerned, which is that, the slightest hint of any pain, you just administer stimulus or have government intervention to try and see deal with the symptoms, whereas you may be making the underlying cause of the problem even worse.
>> Bethany McLean: I'm Bethany McClan.
>> Luigi Zingales: Did you ever have a moment of doubt about capitalism and whether greed is a good idea? And I'm Lui Zingales.
>> Speaker A: We have socialism for the very rich, rugged individualism for the poor.
>> Bethany McLean: And this is capital. Isn't a podcast about what is working in capitalism?
>> Speaker A: First of all, tell me, is there some society, you know, that doesn't run on greed?
>> Luigi Zingales: And most importantly, what isn't?
>> Speaker A: We ought to do better by the people that get left behind. I don't think we should have kill the capital system in the process.
>> Bethany McLean: So our podcast is dedicated to discussing what's working in capitalism and what isn't.
Reshier Sharma's new book blames the Fed for all the promise of capitalism
So we could not pass up the opportunity to discuss a new book titled what Went Wrong with Capitalism? Especially when the author, Reshier Sharma, is a well known FT commentator, has written a New York Times bestseller, the Rise and Fall of nations, and has worked at Morgan Stanley for 25 years as the head of emerging markets.
>> Luigi Zingales: Most importantly, Bethany could not resist the fact that the book blames the Fed for all the promise of capitalism. From low productivity to inequality, from excessive concentration to slow productivity. There is no problem that easy money has not created and no problem that tight money cannot cure.
>> Bethany McLean: Oh, come on, Luigi, that's not quite fair. Anyway, I'd actually argue that the Fed is just an enabler of the bigger problem, which is our addiction to government bailouts and more and more debt. One of the first episodes Luigi and I did together was, on modern monetary theory, the idea that debt doesn't matter. Without ever having officially embraced mmt, the United States in many ways has. Sharma's somewhat heretical idea is that debt indeed does matter. And Luigi, I also thought about you when I read this line in Sharma's book because it sums up your work with pro market in many ways. Pro business is not the same as pro capitalism and the distinction continues to elude us.
>> Luigi Zingales: Indeed, as our lawyer listener will remember, we touch upon the Fed effects on inequality with KN Petru in one of the early episodes in April 2021. Yet this book is much broader in its attack to the Fed. It cricized the Fed's policy to how banks in crisis started with Continental Illinois in 1984. It criticizes Bernanke's anti deflationary policy in the early 2000. It criticisess power'massiveitatively easy introduce post Covid.
>> Bethany McLean: Sharma claims that easy money has facilitated the survival of inefficient zombie firms, reducing productivity growth. It has also exacerbated inequality. Much as Karen Shaw Petru has argued, the wealthy tend to gain more in booms and lose more in a real recession. As a result, the Fed's policy to bail firms out during recessions has benefited the wealthy more. Finally, building on a argument of Luigi's colleague Amir Sufi, easy money has made it easier for large firms to borrow, increasing their market power.
>> Luigi Zingales: The previleingg narrative is that the post World War II nirvana of high GDP growth, high productivity growth and broad increase in per capa income was destroyed by the evil neoliberal revolution led by Taker and Reagan. After this revolution, the narrative goes, the government was tough for resources, welfare was cut, a regulation was neutral. Rucus says that he is all wrong. The US government did not shrink after Reagan, nor did welfare payments. Government regulators increase in number and importance. The only difference is that taxpayers were not asked to put the bill right away. An increased share of the expenses was paid with debt.
>> Bethany McLean: The book is also quite critical vis a vis regulation, in which it blames for the slowdown in productivity growth. Sharma points out that actually almost every president has added to the number of rules on the book. Indeed, there's a lot that's very surprising about this book.
>> Bethany McLean: Let's go back not quite to the beginning.
You argue that we took the wrong lesson from the Depression
One of the things I really like about your book is the, deep recounting of history. But let's go back to the Depression. It seems to me that you argue that we in some ways took the wrong lesson from the Depression. If the conventional view is that we should just spend more and spend more in order to prevent, prevent anything like this. But you cite, the work of the historian Alexander J. Field in describing the Depression as the most intense period of creative destruction in, in American history.
>> Bethany McLean: So what in your view is the.
>> Bethany McLean: Lesson, of the Great Depression?
>> Speaker A: That's a great question. But I think to put this in context here, the Great Depression was seen as a big policy mistake that you had the Roaring Twenties and then you end up getting this big stock market crash which then leads policymakers to say that we need to ignore this. In fact, we need to liquidate liquidate which is to allow this to play itself out on its own. And then you end up getting the Great Depression. But I think that what we forget is that why did policymakers do that? It's because of the experience of the last of the previous century, including what I term in the book as the forgotten depression of 1920, which is that in 1920 you had a mini depression. And at that point in time the policymakers again took the approach which they had for all the previous downturns, that downturns are in fact pretty good for the economy. They end up purging the excesses and they set the stage up for the next boom to begin with, the healthier and the survival of the fittest. And lo and behold, that depression passed without any policy intervention. The in 1920. And then you got the roaring twenties, which as is well documented, was about the best decade the US has ever enjoyed in terms of economic growth. Now as that line goes, the strength taken too far becomes a weakness, which that is what was done. But then you believe that is what you should continue to do it and do it even more aggressively when the 1929 stock market crash happened. And so therefore you ended up getting the Great Depression. Subsequently what's happened is, is that every time now there is a stock market crash or a downturn or any time that there is some fear that we have a recession. The fear mongering now is that oh, we're going to get another Great Depression again if we don't do anything. And here we were, where everybody on television was coming on and saying hey, we need to see the Federal Reserve cut interest rates very aggressively just now because otherwise if they don't do that, we'll end up getting like a recession. So one day stock market decline and the recession fairars come by and that's the policy change which we have seen of 180 degrees. We have gone from one extreme to a completely other extreme.
In America today we have an opioiate crisis, many people argue
>> Luigi Zingales: Now I would like to understand who do you think is the culprit here? And there is no doubt that in the great Depression there was too little intervention. Today there is too much intervention. But who is to blame? is the Fed, the politician, financial firms? All of the above? Nobody, who is responsible?
>> Speaker A: I think that as that line goes, that the road to hell is paid with good intentions. So I don't think that this is all about puting the blame on someone. It's just become the response. And in fact in the book, as I argue, there's an analogy here to pain management, right? Which Is that in America today we have an opioiate crisis. The reason you have the opiate crisis, many people argue, is because of this culture where the slightest hint of any pain, you administer people Drugs and Medicine, OxyContin or whatever that same societal approach has now come to be as far as economic policy making is concerned, which is that, the slightest hint of any pain, you just administer stimulus or have government intervention to try and see, deal with the symptoms, whereas you may be making the underlying cause of the problem even worse. Today, when I look at most people and their policy solutions, it is about just more government, that the government needs to give people greater subsidies to buy homes. The government needs to intervene more to deal with income inequality. The government needs to do more to, fight climate change. The government needs to do more to fight industrial policy. And then this whole impulse that at the slightest hint of any trouble, the Fed needs to intervene to stabilize markets. So it just become complete impulse.
>> Bethany McLean: So, the great financial crisis of 2008 obviously wasn't the first time the Fed stepped in to bail things out. Maybe we can go back to Long Term Capital Management, but we were all there for the great financial crisis. What would you have done differently?
>> Speaker A: Well, I think in the great financial crisis, it may have been too late. What they had to do may have, you know, been justified. But there are two things I think which were wrong after that. One is that even after the financial crisis was over, they continued to set policy as if the crisis was going on, whether it was quantitative easing. It's one thing to do QE in the middle of a crisis. It's another thing like to do QE for a decade more after that. Just look at the precedent, which is that right up until the 1970s, the thought of the government bailing out a, private sector company was considered to be heretical. And there were really no bailouts. This culture of bailout started in 1984. I argue, with the first big bailout of a financial institution in Continental Illinois in 1984. Each time it's gotten bigger and bigger. The policy response and the markets almost seem to demand it now is that every time there is a problem, you expect an even bigger and even more preemptive policy response. The turmoil last year in the in like early spring with Silicon Valley bank, once again, like the whole response there was to rush out the cavalry that we need to bail out the bank. We need to make sure that the depositors don't get hurt. And we implicitly have put in a guarantee now that depositors will never lose money. So once you do it and then you keep doing it, then there is no end to it. And then, yeah, if you don't do it, the reaction will be much greater. Right. The patient's used to getting pain management medicine and if you don't give it, you're going to get a much bigger freak out until the patient gets used to not having it. Somebody needs to be talking about this, that how do we tell people that the government's not here to bail out companies again? Because I think it, it could even be a populist agenda because I think there are a lot of people in America who believe that these kind of bailouts are counterproductive and they do nothing for them. And there's something very wrong and unjust about it. So I call bailouts the modern form of trickle down economics. We have to save these companies because we don't do it lead to mass unemployment, will lead to mass problems in the economy. So it's become the modern form of trickle down economics.
>> Luigi Zingales: So I like your analogy with the opioid crisis, but I have a completely different interpretation of the opioid crisis and as a result I have a different interpretation of what's happening in the financial sector. So in the opioid crisis is pretty clear, at least to me. Pharmaceutical companies massively marketed opioids claiming they were safe. They pay people to do doctors, they knew what they were doing and they were doing for money. A lot of doctors and researcher, et cetera were basically paid for by the very pusher started with Purdue Pharmaceutical. And you go down to all the other ones. I think it's the same in the financial industry. I think that the government reflects the pressure political level, but also at the public opinion level. And this pressure is concultted very often by the financial industry. By the way, most Secretary of Treasury come from investment banks and they continue working for investment banks. When they hire the treasury, it's just a detachment in which they work and they push this bailout policy because he is in the interest. So you have worked for a long time for one of these investment banks who benefit tremendously by the way, by the bailout because Morgan Stanley would have gone bus.
There's been an explosion of new regulations in America over the last 20 years
So why aren't you more critical about all this ecosystem?
>> Speaker A: I'm critical as much as I can be. As I argue in the book that the real problem in America today also is the amazing concentration of power and the rise of oligopolies. The rise of these oligopolies and the concentration of power that even you're alluding to, a lot of this has been caused by this incredible amount of regulation that we have. As I show in the book, in the last 20 years, there's been an explosion of new regulations in America. There are 3,000 new regulations which are brought in every year over the last 20 years. And the number of new regulation that's been withdrawn has been 20 in total. It makes it very difficult for new businesses to start up because the cost of complying with these regulations is incredible. Twenty years ago, if you were to start your own investment fund, compared to today, the cost has gone up 10 times just because you have so much more legal compliance and other things that you have to deal with administrative costs. It leads to much greater scope for regulatory capture that the top people like in Washington, the lobbyists, they're all work for. Some of these very big, large firms. These days, it's all the tech firms. And I think that this whole idea where you end up getting people so easily to switch between working in the government, then in the private sector, working the private sector, and then getting into government, I think there's something wrong with that nexus as well. So I'm all with you on these facts, but we need to analyze as to what's really causing this incredible concentration of power and what are the negative consequences of it. The incredible amount of regulations that people have to deal with. As a little data, I have in the book, that 16 of the time that Americans spend today at work is in dealing with these testimonials and legal compliance courses in time, 16% of your time goes into that. That's quite a staggering statistic. And the dead weight that causes on the economy and the stress it causes for the average person.
You argue in the book that capitalism is in worse shape in Europe
>> Bethany McLean: You have a line in the book that I think sums this up and that I thought would be music to Luigi's ears, which is that pro business is not the same as pro capitalism. And the distinction continues to elude us. So do you think there are any capitalist companies left in America?
>> Speaker A: There's still a lot of strengths as far as America is concerned. And as I argue in the book that capitalism is in worse shape in Europe, and it shows up in the productivity numbers, it shows up in the regulatory environment you have in Europe, and the creative destruction that you have in Europe is far less compared to even America. So, there's still a lot that I like about this country, but I'm trying to say here that the direction of travel is wrong. And why are so many people disaffected with capitalism, even though at the surface economic growth seems okay and the overall economy seems okay. So why are so many people distressed by it?
>> Bethany McLean: So you also write that in one part of the book that government for the last four decades has been contributing to the rise of oligopolies in three ways. By abandoning antitrust enforcement, by expanding regulation in just about every other way, and by soaking the capitalist system in debt through easy money policies. in another part of the book, you say, as destructive as oligopolies can be, even the most powerful need to be contained with a death toouch, not populist vengeance. So on that specific question of antitrust enforcement, which is a big question today, obviously, how aggressive should the government be?
>> Speaker A: I think that the big oligopolies have gotten to a point where you need greater antitrust action, but you need a proper structure to do it. Because in China, we just saw that they're trying to curb, the power of the big firms there. And doing it an arbitrary political way is leading to a lot of damage. And the second thing that I say also here, just doing antitrust may solve the immediate problem. But how do you prevent oligopolies from coming back up again five to ten years from now somewhere else? And so unless you clean up the regulatory act, where regulation becomes pro competition again, rather than the kind of regulation you have today and the overgulation, which is pro big business and pro incumbent, my fear is that, okay, fine, you do antitrust now, but five, ten years down the line, you'have oligopolies somewhere else if you keep going down the regulatory path. So it has to be both.
>> Luigi Zingales: So we agree on the antiruition, and I even agree with you that serious antitrust should be joined by some restructure of regulation. In a book I wrote more than 10 years ago, one of my suggestions was trying to simplify regulation that makes it more enforced by liability suit rather than by regulators. A lot of regulations that start very well intended but end up with the opposite. So the simpler the regulation, the more transparent, the more understandable is, and the more support can have from, the public at large, but also the easier it is to enforce and can be enforced through aggressive litigation.
>> Speaker A: Broadly, what you're seeing makes sense to me. And I think this is where we are possibly in disagreement with other people who tend to be very free market. They feel the mention of antitrust is antithetical to capitalism and free markets. And I think that what we are saying is that the system today has been so distorted that you need some corrective mechanism. And if it's got to be ant antitrust, but be it, you cannot ignore the fact that these companies are earning supernormal profits. And something needs to be done to check that. Because with those supernovmal profits, they're just galloping and galloping ahead and they are being able to corner so many other markets and also engage in practices which are borderline immoral. Capitalism unfortunately, has earned such a bad name where it is seen by many people to promote these oligopolies. It's seen to be promote profits and greed and all those adjectives which go along with it. But I think it's the job of pure capitalists to emphasize that capitalism is about companies profits being competed away over time and not in terms of your, companies earning supernormal profits for such a long period of time that over the last 15 years, these tech companies in particular have earned profits like companies have really ever done in the history of the world.
You argue that easy money has led to decreases in productivity
>> Bethany McLean: So I actually had a question for both of you. You argue in the book that the growth in government, the gigantic growth in debt, has led to decreases in productivity. And you draw on some work by Atif Mian and Amir Sofa, the friends of Luigi's at the University of Chicago, complaining that the years of low rates set by the ECB were helping big hotel chains get bigger run little guys out of business. Is this idea well understood and accepted in economics or is it a contrarian idea?
>> Speaker A: I think that like their work got a lot of play as we know when they first came out with it. But I still feel it's a relatively contrarian idea. What the ills of easy money have been over the last couple of decades. In particular, I think that point is not that well understood. The top you of concentration of power caused by easy money. And at the lower level you have so much dead wood which is kept alive and in doing so you are squeezing out the a lot of the big middle. And a feeling that has being created is that there's an inequality of opportunity here for new entrants. I think one of the very important moments in financial and economic history was the stock market crash of 1987. For the first time, a Fed chairman actively intervened to prop up the stock market. And that then led to the label of the Greenspan put. And after that it's become like that way, that of this asymmetrical reaction, which is that on the downside you have the central bank saying we're here to protect you. Something really goes wrong. And on the upside, even if there's a bubble. They're saying we don't know how to know if it's a bubble. So there's nothing that we're really going to do.
The idea that easy money created monopolies is still controversial in the literature
So this entire notion that on the upside you can capitalize your profits, on the downside your losses will be socialized I think is the other sort of distortion that's been caused.
>> Luigi Zingales: The idea that is the easy money that created monopolies I think is still fairly controversial in the literature. The example that you provide in the book, which is a very nice one, where the hotel owner in Spain saying oh, it's because of the easy money that all these chains are basically eating my lunch. I'm not so sure that that's the reason. There are many more economies of scale even in tourism. And as a result they are eating their lunch because of these economies of scale. And this happened at the time of his money. That may have accelerated a beat what was happening anyway. But it's not the easy money. It is Walmart conquered the United States during a period of not easy money. But it conquered because of a better logistic and was able to compete very aggressively. And the Mamm pop store may have blame something else, but that was not a reason. So I'm not so sure that that's the reason for concentration.
>> Speaker A: What I'm seeing here is that there's some issue where it's not concentration happening in one industry which is fine, it may be okay. It's concentration happening across industries and concentration happening in industries which are both domestic and global in nature. If it's happening across the board, I think there's something wrong.
>> Luigi Zingales: I don't know whether is wrong. There'something that we need to do. I think that one of the things that is across the board is the technology. And the other thing is that as we globalize is easier to compete at.
>> Luigi Zingales: Ah, the global scale evidence that present.
>> Speaker A: In the book shows it's much bigger than that which that it's even coffin makers beer industry. So these are things which are like where you're seeing just two or three players increasingly concentrate. So it's not just about industries which are global or rich in technology. Often the top most people who are the lobbyists in these industries if you just see it or the top donors, they all tend to be from these top businesses.
>> Luigi Zingales: Oh absolutely.
>> Luigi Zingales: But I think that the reason there are the acquisition without antitrust. In fact if we do respect often the investment bankers who come and propose acquisitions where they say oh, there is more resiliency in price, which is a politically correct way to say market price or there are unspecified synergies because they don't want to say on the record that they are doing for market power, but they are going for market power. So in that sense I do agree 100% with you on the antitrust law think.
>> Bethany McLean: But I think you did see the.
>> Bethany McLean: Non economist vantage point.
>> Bethany McLean: You did see this in the pandemic where you had all sorts of very weak big firms that thanks to the Federal Reserve's largess were able to access the capital markets at very low interest rates and bail themselves out and smaller firms. While yes the government did try to help smaller firms through various programs, but they didn't have access to that same largess. And that led to the death of a lot of small companies and the survival of a lot of big companies. Which again is just an example from a moment in time. But I do think of telling one.
>> Luigi Zingales: One thing that I found very interesting in your book is the fact that the so called Reagan reolution not only did not cut the size of the government, which I knew, but did not even cut the size of welfare. So for all this blame on Dragon and the turning point, et cetera, very little has happened except we stopp financing public expenditure with taxes and we finance with debt and then we buil an enormous level of debt which will have consequences. as you are. I am an immigrant from Italy and I feel like I'm leaving the same story twice in my life because I come from a country that was corrupt where large amount of debt, slow growth and all of a sudden kids start to live with a family because house prices are too high and they cannot afford it and as a result don't have kids which exacerbate an letality problem, et cetera, etc. So this is the Italy I left in 1988 and this is the United States I find now in 2024 the debt to GDP level is at the level that I left Italy in 1988. And the sub of 30 years have not been great for Italy, as you know. So I feel that the subsequent 30 years for the United States might be as bad.
>> Speaker A: I think that among many economists now also it's become a thing that deficits and debt don't matter because for the last 30 to 40 years there's been no apparent consequence. But I think that the points that we want to make sure are two fold. One, on the debt and deficits itself that the US was running ah A debt and deficit level for the last few decades which was pretty much in line with the average of other developed countries. About 3% deficit every year. and the debt to GDP also was somewhere in the middle of the pack of other countries under the Biden administration. We have got into a level where the deficit, see we seem to be in a permanent deficit of nearly 6% of GDP. And also the fact that the debt levels now have risen to a level where the US will surpass Italy as the second largest indebted developed nation by the end of this decade. But the deeper point I, I'm trying to make in the book is that it's not just about debt and deficits where you can measure the government's involvement in the economy. It's, it's the entire suite of habits. The bailout culture, the micromanagement of the business cycle, the propping up of zombie firms, the regulatory environment. It's the whole suite of habits. In fact, in, one of the sections that I related to a lot in the book, and I think many of the readers will, if you were to look at the leading symbol for many people as to what went wrong with the American dream, and in a way then what went wrong with capitalism is property prices. The stat I find most staggering is the fact that the number of new households being created in America today is the same as it was in the 1950s even though the population has doubled. So there's a massive shortage of new housing supply in America today. And it's all got to do with what's gone broadly wrong with capitalism. The amount of regulatory stuff that you have today makes it so difficult for new homes to be built. And whether it's the zoning laws, the coding laws and then also about how they entrenched and the elite work, whether entire system is there to benefit people who already own homes. And for anyone new coming into their neighborhood, it's very difficult. The nimbyism problem has been described out.
>> Bethany McLean: Here and you mentioned in the book, but you didn't mention in what you just said, the role that easy money has played in that, particularly the government's purchases of mortgage backed securities throughative quantitative easing. So I just had to toss that in there because that's a particular, it's a particular bugom.
>> Speaker A: That's right. But the demand side we have seen that which is like in terms of on the demand side what easy money has done to prop up asset prices. But on the supply side what the entire regulatory environment has done to kill the growth of new Housing supply in the market.
>> Bethany McLean: If you're enjoying the discussions Luigi and I are having on this show, there's a another University of Chicago podcast network show you should also check out. It's called Big Brains. Big Brains brings you the stories behind the pivotal breakthroughs that are reshaping our world. Change how you see the world and keep up with the latest academic thinking with Big Brains, part of the University of Chicago Podcast network. So our listeners should know that the podcast was recorded before the election, but Luigi and I are recording this after the election. So we're going to update some of Sharma's ideas for the current state of affairs. But before we get to some of those questionsuigi, there was an unresolved disagreement in our podcast that I wanted to touch on.
Sharma argues that easy money helped to breed monopolies
Sharma argues that easy money helped to breed monopolies. You say no. It seems to me, although I may be mistaking correlation for causation, that he's right and that the argument is yes. So I wanted you to expand a little bit on why you disagree with that notion.
>> Luigi Zingales: So there is clearly a correlation between the two, but it'not necessarily causation. And yes, my colleague as a paper trying to argue that easy money only favors the largest firms and not reduce the credit constraints of a lot of smaller, players. But the tradition of finance view is that when you decrease interest rates, the people who benefit the most are the ones who can access to credit at all. And when the rate goes down, all of a sudden can have access to credit. If you are Amazon or Apple and you can borrow at 2 instead of borrowing at 5 is a benefit. But if you are Chuck E. Cheese, my favorite small M company, it's not that small and you could not borrow at all. And all of a sudden you can bor it 5. That's an enormous improvement. So I don't see this as the major cause of concentration. I think technology play a role and the, the other topic where you might be right is that regulation might played a role because regulation is quite asymmetric, does represent a fixed cost and so it's very difficult for small firms to keep up with regulation. Certainly what we know is that after Dodd Frank was passed, we had no entry of new banks for a few years. I don't remember how many. No creation of new banks because the regulation was too big for anybody to even try.
>> Bethany McLean: Wait, I have a comment on this. But before I get to my comment question, I have a, ah, very important question. Chuck E. Cheese is your favorite company? Why?
>> Luigi Zingales: No, it's My favorite example of the teeny tiny company that has been around for a while, survives, but it's not a darling of anybody. Right in the. If you think about a company for which, regulation probably applies because they don't have a lot of Lobies in Washington, they don't have a lot of campaign financing, they're not like a big company that with a lot of influence.
>> Bethany McLean: Isn't there a horror movie that's based on Chuck E. Cheese? Or am I confusing two different things, Chuck E. And Chuck E. Cheese. Anyway, whatever. I can't help thinking that this might be a case, which is rare for you, where you're putting economic theory ahead of practical evidence to the contrary. And I know economic theory would say that smaller firms would benefit in low interest rates and rate environments. But when you look at the experience of the last decade, couple of decades where big firms have been able to access big firms who might otherwise have failed have been able to access the capital markets at really low cost because people are so hungry for yield, investors are so hungry for yield in a super low interest rate environment. And that has led to the creation of all these zombie companies. It seems to me that economic theory might not be operative for the current times.
>> Luigi Zingales: You might be right there. That's a different point that Rooer makes easy money may slow down productivity increases. If you are saying that easy money help Boeing survive the crisis and Boeing is now an inefficient firm, I think you're right. But if you're saying that easy money help pharmacy create an oligopoly, help beers create an oligopoly, help sort of a dialysis center to consolidate, no. If, to some extent that stuff has done, more by your other good friend, private equity rather than easy money. Now easy money did help private equity probably, but'quite indirect.
>> Bethany McLean: All right, I can see how the link to easy money allowing businesses to survive that wouldn't otherwise have survived and therefore leading to monopolies isn't necessarily a direct one. But still, I think there's something interesting there. And I'm always fascinated in this idea that economic theory isn't what actually happens in reality. I mean, economic theory would also have it that the less well off benefit more in a period of, super low interest rates because they can borrow and get credit, where when interest rates are higher, not only can they not get credit, but the interest costs take a bigger bite out of their budgets. But yet, Karen Shaw Petru's research showed that actually high interest rate credit Cards and auto loans dec very rates decline very little even in a period of really easy money. So it's actually per Sharma's point to the wealthy who really benefit from these periods of easy money. So again it's another place where theory, economic theory does not seem to be what happens in reality but especially given the election and the well publicized plans of Elon Musk to slash government spending that Sharma'points about how difficult that actually is to do and that even Ronald Reagan didn't actually do that are really really relevant. What did you think?
>> Luigi Zingales: So there are a lot of government ways that should be with use and a lot of regulation that is self serving and not useful. But there's also a lot of government help that is really helpful and a lot of regulation that is really helpful. And so the difficulty is not to cut expenditures and cutting regulation is to cutting the bad one and maintain a good one. Think about housing that we discuss with rucer the restriction of building more are we evil because restrictict supply and keep prices high damaging especially the younger generations. However, the building codes that make sure that houses don't collapse when there is a healthquake or they are more resilient to huricanes or there are more resilience to potential sort of power outage and so on and so forth those are extremely helpful and we see that when they disappear. looking in Florida ah we see in a condominium collapsing, killing a lot of people including actually Chicago student that was there at the times. So I think that it's pretty important to remember this and the same is true with government money. I think there a lot of waste. But when we analyze poverty with Desmond and with federal gram we saw that there are certain government m expenditures that are really targeted to people who are starving, targeted to children in need and cutting doors is not good from.
>> Speaker A: Any point of view.
One of the things I liked about Sharma's book is that debt and deficits matter
>> Bethany McLean: One of the things I liked about Sharma's book and one of the things that he was willing to say that is becoming a bit more of a topic of conversation is this idea that debt and deficits do matter. And you've had in the last month or so a couple of very prominent financial market people, namely Stan Drucken Miller and Paul Tudor Jones, who have run huge successful hedge funds for many decades come out and say that this is basically the biggest problem facing the U.S. economy. And I think that you and I might agree on this. So maybe there's not a lot to argue about here.
>> Luigi Zingales: O absolutely. As I said in the conversation with him as an Italian who has seen the long term cost of very high debt to gdp. I'm always very worried. I've always been a fiscal ock to some extent and I'm particularly worried now because the growth has not been fabulous and there is an important fertility issue that yes we can compensate if we open our borders and let a lot of the ##migrants in but the preferences of the majority of Americans don't seem to be very much in this direction at the moment. And so the combination of these factors I think make the burden of the existing debt and various obligation very heavy and difficult to dismiss like most people have done.
Scott Bascent will be the first Treasury Secretary who is gay
>> Bethany McLean: We're recording this episode just after the announcement that hedge fund manager Scott Bascent would be Trump's Treasury Secretary. Luigi, do you have any thoughts on him or what he might be in for in this role?
>> Luigi Zingales: So I don't know him. It's kind of an interesting choice because first of all dismisses all the stereotypes that people have of Trump is you're going to be happy to know he's going to be the first Secretary of Treasury who is gay. He's also a former Democrat like by the way Trump was because he donated money to buy his Democratic campaigns including if I'm no mistaken the one that comes Hars gave as Attorney General of California many years ago. but he was also an employee of George Sa'that he is seen by the right as the evil in person. So I'm glad actually because shows very open mindedness on the side of Trump and there is a part of me that feels reassured because if you come from the financial markets, if you are a former Eddge fund manager the last thing you want to do is to screw up the fiscal policy and have the bond market going haywire and consequently the stock market going haywire. So in that sense is good. On the other hand I am a little bit concerned that all over the vast majority of the Secretary of Treasury especially under Republican administrations they come straight from Warl. And so the very problem that Rucher was mentioning I exacerbated because whether these people are in it for the money or in it for the environment, if you spend like Han Paulson all your life at Goldman Sachs, Goldman Suc collapsing is inconceivable. It's like a tragedy even if you don't have any shame. Orman Sach, you see that this as the end of a America as you know it because it's True. It's the end of America as you know it because that's what you have.
>> Speaker A: Known of your life.
>> Luigi Zingales: Han Paulson is a very nice guy, etcetera, but acted very much aligned with the interest of Goldman Sachs. So I will not be surprised if beIN will behave the same way.
>> Bethany McLean: Although I guess I might argue with you on that point and time will tell. But people from the hedge fund community are very different than people from the big bank. So he is actually a very different figure than a big bank CEO. And people from the hedge fund community have less loyalty to today's, to the big institutions than someone from a big institution does. So I think there's this myth that big finance is all alike and everybody is motivated in the same way and it's actually not true. People who come from the hedge fund community can be quite anti institutional in a way that someone who comes from a big bank would not be. Becent was reportedly part of George Soros huge bet against the English Pound. If you come from a, way back in the day, if you come from a culture where shorting is encouraged, you have a little bit more of a contrarian bent. I actually am really encouraged that he understands financial markets and is likely to be concerned about debt and the deficits. But I was thinking if I could be a fly on the wall for any conflagrations that are coming in this White House, I would have to choose and I think I do know which one I'd pick. But I'd like to sit in on all the conversations between Trump and Elon Musk because man, that one's going to blow at some point. But I'd also love to sit in on the conversations where between Trump and Scott Descent because I have to believe that that one's going to blow up at some point too. Because if the cent does care about the debt and deficits, then that's going to put him at odds with Trump at some point in the near future. And if what everyone says about Trump that he does want yes people and people who are loyal to his point of view, that could eventually be a problem.
>> Luigi Zingales: Yeah, but dis appointment suggests that Trump does not only want yes people and I think he wants to please a particular side of the economy. I think that that's why he chose Bason.
>> Bethany McLean: Yeah, I hope that that turns out to be right.
>> Luigi Zingales: Indeed. The point I was trying to push him because I wanted to see how far was willing to go is it's very easy to say no bailout to large Firms. but the question is, are you also saying no help to anybody or are you saying we help people? But not first because a point that Raagur Rajam and I made, more than 20 years ago in our book Saving Capitalists from the Capitalists is that if you want to prevent bailout exposed, you have to have ah, a safety net in place that absorbs the cost, for people because otherwise it's too easy for the affected entrepreneur, ah, to use the workers as human shield and say, oh, you can't let the workers suffer. And of course this is just a ploy because at the end of the day the real beneficiaries are the entrepreneurs themselves. And so the only way to break this vicious circle is to have a good function in welfare state. Now I'm in favor of welf est state, regardless. But in addition, I think that this is a very important point and I did not see him coming down on this point. He sounded more like early 20th century, liberal in the conservative way that say, basically liquidate, liquidate, liquidate, whatever damage, eventually people are going to be better off. But we know that eventually can be a long time.
>> Bethany McLean: And when you look at recent history, that is exactly what has happened. Big business has used people as human shields from the financial crisis where the big bank said, if you let us go down it will be incredibly destructive to the economy and it's the people who will hurt the most. To the Silicon Valley bank collapse where the big venture capitalists who went to D.C. said you can't let our companies fail because if our companies fail then all these people are going to lose their jobs. They didn't say, and we're going to lose our investments. Which was of course the real story in each case. and you know, my argument is about supposed private credit that exactly the same thing will happen if private credit runs into trouble. They'll go to D.C. and say all the investors in our funds, the underlying investors are actually pension plans. So you can't let us collapse because it will end up hurting all these people who are invested in our funds. And by the way, the size we are will createor the economy. So you can't let this happen. So I think it's not only something that has happened in the past, but is also relevant for the future. I don't know though, per your point that a better welfare state, would help that. That's an interesting thought and m. I'm not sure it would because the arguments are very sophisticated for Example in the case of the financial crisis, it was people won't be able to go to the bank and get their money out of a cash machine and it will cause mass panic. And in the Silicon Valley bank collapse, it, it was employees of tech companies who aren't your usual, recipients of a welfare state. So I don't. I suppose in the case of private equity, if people had a more secure retirement, then the argument that well, you're going to createor people's retirement if you don't save us wouldn't be a good one. But I just, I don't know. I think, I think the arguments are going to be so sophisticated that just having a better welfare state is not likely to fix.
>> Luigi Zingales: I don't think it's sufficient. I agree with you, but I think it's a necessary condition because without the necessary condition, people would feel too insecure. By the way, at a conference, speaking of SBB bank at a conference, I discovered this fascinating aspect. It's a little bit technical, but I think that our listener will enjoy the story. If I am, allow so many depositors in, svb, the one with big money, add what is called a sweep account. So it means that when youos deposit exceed certain amount automatically is trel into a money market fund. Of course, if it's a money market fund because it was backed by real assets, you were basically perfectly guaranteed. But if it was a deposit and was above the 250 threshold was not guarantee. However, it was not clear the legal nature of some of these money market sweep accounts because, many pay in interest like money market, but are de facto deposits other they are really money market accounts that are legally separate. So in the famous weekend of March 2023, basically everybody went to a couple of law firms and trying to figure out which was which. And so they spent all the weekends trying to figure out how many of these deposits were basically de facto in the money market and so not at risk and how many were at risk. And they arrived at the conclusion, close to the late afternoon of Sunday, that in fact the vast majority was in real money market funds that were legally separate and were not lost a dime. however, this arrived too late because by that time Janet Yellen had already declared a blanket insurance. And so the problem was moved.
>> Bethany McLean: is that true? That's an incredible anecdote that might be one of my favorite stories of all time. Oh my goodness, that, that is truly amazing. I do really like Your point that a better welfare state be might be necessary but not sufficient. But I actually think Well I was thinking while we were talking about this that it is something that is lost in the regulatory framework and I think not part of the discussions about how to prevent future bailouts which is what do you do with the populace when firms can mount a convincing argument that it's going to be the people who suffer the most? And how do you prevent that from happening? And if we were really trying to develop a anti bailout culture or framework then we would be thinking about that aspect of it as well. Not just laws like the, the resolution act for big banks but actually thinking about what you do to make sure people are protected. So big powerful companies can't use that argum.
>> Luigi Zingales: Yeah, absolutely. Because all the mechanisms were in place is trying to tie Odess to the mast. But you know that when things become sort of too scary then you're going to untie him. And so I think that what we need to work more is creating the condition so that ulyisses is not attracted to the sirens. In fact you know that all the sailors in the story had ear plugs, so that they wouldn't be seduced by the songs of the sirence. And so we need to put a lot of the plaques to all our politicians.
>> Bethany McLean: That's a fantastic note on which to end.
Capitaln't It is a podcast from the University of Chicago Podcast Network
>> Matt Hodap: Capitaln't It's a podcast from the University of Chicago Podcast Network and the Stieler center in collaboration with the Chicago Booth Review. The show is produced by me, Matt Hodepp and Leia Csreen with production assistance from uttsav, Gandhi, Sodom, Kim, Sebastian, Burka, Andy she and Brooke Fox. Don't forget to subscribe and leave a review wherever you get your podcasts. If m you'd like to take our conversation further, Also check out proarkket.org comm, a publication of the Stieler center and subscribe to our newsletter. Sign up at Chicago Booth. Edu Steieler to discover exciting new content, events and insights. We hope you'll join our community today again at chicagobooth. Edu Steieler.