Preet Bharara:

From CAFE and the Vox Media Podcast Network, welcome to Stay Tuned. I’m Preet Bharara.

Ruchir Sharma:

True capitalism is supposed to lead to at least an equality of opportunity, a feeling of an equality of opportunity, and I think that today what many Americans are feeling is they don’t have an equality of opportunity, that the system is being run by a few people for a few people.

Preet Bharara:

That’s Ruchir Sharma. He’s a long-time investor and a contributing editor and columnist for The Financial Times where he writes about global economics, politics, and policy. He has also authored five books. His latest, What Went Wrong with Capitalism takes readers through the history of capitalism in America. Sharma joins me this week to discuss fiscal policy, government intervention, and what this election might mean for our economy. That’s coming up. Stay tuned.

Now let’s get to your questions. This question comes in a tweet from Bee Rad, who writes, “A lot is being made about Trump admitting to interfering in the election in a recent interview. Do these sorts of public statements ever really impact what the DOJ does or is it wishful pundit thinking?” Right, that’s a great question. And of course, you’re referring to an interview he gave on Fox News just this past week where he said the following, “Whoever heard you get indicted for interfering with a presidential election where you have every right to do it, you get indicted and your poll numbers go up.” So the short answer to your question is the kinds of statements that Trump makes, whether on social media or in speeches or on television, absolutely can play a part in decision-making by the Department of Justice. Of course, there are arguments and various interpretations to be brought to bear on statements he’s made publicly, and lawyers can argue one way or another.

Trump has a habit of going up to the line, but speaking in a code where he can assert plausible deniability. In this matter, the fact that he said interfering, I’m sure if it ever comes up in a courtroom or in a proceeding, his lawyers will say, “Well, he wasn’t really intending to mean interfering. He wasn’t admitting anything. He was simply saying that consistent with the immunity decision from the Supreme Court, he had lawful authority as the President of the United States to engage in certain conduct. And that’s what he did, and it was perfectly lawful.” So I don’t know how powerful that so-called admission is. It’s good politically and it’s good perhaps to a jury to provide some context showing how Trump believed himself to be above the law. But I’ll tell you, there are many other examples of statements that Trump has made that have found their way into legal proceedings.

And by the way, just to be clear, all of those statements that are made by a criminal defendant are admissible in a court of law because they’re admissions by a party, and Trump in those cases that we’ve been covering is a party. For example, you may recall in the case brought by the Manhattan District Attorney relating to the hush money payments, an important bit of evidence became, there’s a lot of fighting about it, but Trump’s own statements from the Access Hollywood tape where he said, “I just like kissing them,” et cetera, et cetera, et cetera. I won’t repeat that here. That became a central point for the government. Although they were not allowed to play the audio of the tape, they were permitted to get the transcript in to show how much Donald Trump and his campaign team were worried about the consequences of other bad revelations coming out, including the payments to Stormy Daniels. So those are statements by Donald Trump that affected the decision making of prosecutors in a very real way, in a very real case.

I’ll give you another example. In the classified documents case in the federal courthouse in Florida, which we’ll come back to in a moment, Donald Trump is cited in the indictment multiple times talking about the importance of protecting classified information and talking about the enforcement of the laws that protect classified information. He said in 2016, among other things, “In my administration, I’m going to enforce all laws concerning the protection of classified information. No one will be above the law.” He also said, “One of the first things we must do is to enforce all classification rules and to enforce all laws relating to the handling of classified information.” Further, “He said, we also need the best protection of classified information.” And then to drive the point home in the indictment is a quote from Trump that says, “Service members here in North Carolina have risked their lives to acquire classified intelligence to protect our country.”

All of those statements in the indictment, if there were ever to be a trial, presumably all of those statements would be put before a jury that show among other things, Trump’s direct knowledge of the laws, of the importance of protection of that information, and of the sanctity of the lives who protected that information. This question comes in an email from Jules who writes, “Hey, Preet. What are your thoughts on Jack Smith’s brief to the 11th Circuit not including a request to reassign the case from Judge Cannon? Love the show. Thanks.” Well, Jules, that’s a great question and one that Joyce Vance and I discussed at some length on the CAFE Insider this week. It’s a question that comes up, you’re not the only person to have asked it. And we’ve wondered about that for some time now. People may recall the Judge Aileen Cannon, who is a Trump appointee herself, has ruled in a way that has drawn the rebuke of the 11th Circuit. It’s the court of Appeals that sits above her, district court in Florida.

And so there has been speculation, and I think reasonable speculation, that maybe there would come a time when Jack Smith would take issue not just with her rulings, but with her continued presence overseeing the case. I think that he could have gone either way on this one. Obviously, the appeal in this case is a definitive one. It’s central to the entire matter. Judge Aileen Cannon found essentially uniquely of all the courts ever to have considered the matter that the appointment of Jack Smith as special counsel was unconstitutional for various reasons. As Jack Smith and his team point out in their briefs, for years, for decades, whether it was an independent counsel or a special counsel or some other similar designation, the Constitution and various statutory structures make it absolutely clear that such an appointment is allowable and legal and appropriate.

So in this question I defer a little bit to my friend and colleague, Joyce Vance, who practiced in the 11th Circuit and was an appellate lawyer and the chief of appeals, and her view was, look, they’re laying all the facts on the table. Every single judge on the 11th Circuit is aware of what’s going on in that district in Florida. Some of those judges were involved in the rulings, overruling and rebuking Judge Cannon, and it’s not really necessary to explicitly ask for a reassignment that could come up at oral argument, she mentioned, in her own experience. And if the court, the 11th Circuit that is, decides that this was a terrible decision and follows on the heels of other terrible decisions, it can decide in its own discretion even without an explicit request from Jack Smith to reassign the case. And that’s the path that Jack Smith took, which I’m not going to quarrel with.

This question comes in an email from Hiland who writes, “Hi, Preet. As a long-time listener, I’ve noticed you have a great sense of humor.” Well, thank you, Hiland. “Do you have anecdotes of humor being used in the courtroom or just funny moments you’ve experienced when trying a case? Thanks.” Well, that’s a great question. If you’re a listener of the show, whether or not you think I have a sense of humor, I think the sense of humor is important. I think humor is incredibly important in getting us through difficult times, not just good times. You have to be careful about using humor in the courtroom and around the courtroom, particularly in criminal cases. The matters at hand are incredibly serious, the stakes are incredibly high. Liberty is involved. These are life and death things that are being decided by judges and by juries in these courtrooms. So you want to make sure that your humor doesn’t backfire, you want to make sure that you’re not trivializing the proceedings.

But on occasion, humor can really help a lot. I wrote about this in my book, and I will not be able to say it better than I did, with respect to how to use humor from time to time to defuse a situation with a judge. So let me read these few paragraphs from Doing Justice. I wrote this, “Sometimes, if the moment is right, even in the most tense standoff with a judge, standing up for yourself with a quick human and humorous reaction can disarm the court and advance your cause. Here are two quick examples from before my time in SDNY. The late Judge Kevin Duffy was appointed to the bench at the astonishingly young age of 39 and had grown over decades, perhaps out of boredom, into one of the most curmudgeonly judges on the bench. One day, an assistant US attorney was examining a witness and veered into a line of questioning that the judge believed violated one of his rulings. He erupted in open court, his voice cut the air, ‘If you do that again, I’m going to have your balls.'”

“The courtroom went silent. This was a peculiar threat, insofar as the prosecutor was female. The prosecutor looked back at the judge and replied, ‘You know, judge, if you can find them, you can have them.’ The tension broke and the judge laughed. At that moment, I’m told, she became one of Judge Duffy’s favorites. Here’s another story. Andrew McCarthy, a headstrong prosecutor, later a strident opinion writer for National Review, who you may know, was in a spirited exchange with Judge Whitman Knapp one day during a trial. The jury was not present. At one point, Judge Knapp snapped, ‘Basically, Mr. McCarthy, your position is (beep) you.’ ‘No,’ Andy quickly corrected him. My position is (beep) you, Your Honor. Judge Knapp laughed. The key point in these stories is that the people laughed. And thank goodness. Laughter, and jokes in some environments, say in a high stakes trial or in an operating room or in a military mission, may seem horrendously off-key, inappropriate and disrespectful. I hope that is not always so. The reason every pressure cooker needs a release valve.” I’ll be right back with my conversation with Ruchir Sharma.

As the presidential election nears, Kamala Harris and Donald Trump have put forth various and competing economic proposals. But are they any good? Long-time investor and columnist, Ruchir Sharma joins me to discuss. Ruchir Sharma, welcome to the show.

Ruchir Sharma:

Good to be here, Preet. Thank you.

Preet Bharara:

So congratulations on your recent book. I don’t know if you want to say it’s polemical or not, it’s called What Went Wrong with Capitalism. Before we talk about that and before people have an immediate reaction and before Donald Trump starts calling you Comrade Sharma, I would note that you are the chief investment officer of an investment firm. You are not anti-capitalism, correct?

Ruchir Sharma:

No. In fact, this book in some ways is an ode to capitalism because it traces my journey from a very socialist India to coming to New York in search of the American dream 22 years ago and seeing many parts of that American dream be fulfilled, but also seeing as to how capitalism has been so badly distorted where we’re seeing this socialization of risk where people on Wall Street have done fabulously well over the last few decades. But for the average American, the current system that we have in place, the current economic system we have in place is just not working. That why are most Americans today saying that they want major change in the way the economy is run? And why do most young Americans today say they would rather have socialism than capitalism? So this book is really a revisionist history of capitalism, it’s a chronicle of capitalism, traces the three-hundred-year journey of capitalism and what really has happened in the last few decades to leave so many Americans disaffected with the economic system we have today that we still call capitalism.

Preet Bharara:

Before we get to the substance of policy and what makes sense and what doesn’t and went wrong with capitalism, to quote the title of your book, do you have a view as to why it is that good faith debate and discussion about economic matters, and in particular socialism and capitalism and even communism, why that debate is so stupid?

Ruchir Sharma:

So as you know that in the age of social media, we have lots of stupid debates, so we will put this down to that.

Preet Bharara:

But even before social media.

Ruchir Sharma:

Right.

Preet Bharara:

In terms of political argument, the right is very quick to call anybody on the democratic side or on the liberal side, a socialist or a communist when they suggest even the mildest tweaks to the safety net. Why is that?

Ruchir Sharma:

No, I think that labeling is very simple, but I think that as I’ve argued even in the book here, Preet, which is that if you look at the policies of the right too over the last few decades, they’ve also been quite statist. So I think that it is unfair for the right to just target the left by calling any tweak they do to welfare policies as being communist or statist. And the current Republican Party, in fact has been adopting a much more statist government interventionist stance as we know from many of their policies. So I think that this has been a bipartisan project over the last 30 to 40 years in terms of the decline that we have seen in capitalism.

And I think that that’s what I’m trying to show here, that even under the great apostle of capitalism like Ronald Reagan, as I show in the book, that you saw a big increase in the government’s role in the economy, including the bailout culture, which really started in the 1980s, the reaction of the US central bank, which started under Greenspan, where every time the market falls, the central bank is called in to rescue the market. But when the market is flying and doing well, it’s fine. So it’s capitalism on the upside and socialism on the downside. So I’d say that even under Reagan, I think, and this is one of those big research projects that I found fascinating when writing this book, that we saw an expansionist role of the government. So I just don’t see as to why one side or the other can claim that they have done anything to be true to the capitalist ideals.

Preet Bharara:

Is that what you mean when you write in the book, “Capitalism has not failed, but it has become socialism for the rich?”

Ruchir Sharma:

Yes, because as I just illustrated that we have these policies in place where it seems that risk has been socialized, which is that the bailout culture, the regulatory culture, the micromanagement of the business cycle, it’s a bit analogous to the America’s approach to pain management and why we have an opiate crisis, which is that every time anyone suffers from some pain, you administer them opiate. So you get hooked to OxyContin or other such drugs and you lose your natural ability to fight anything. And all you’re doing is dealing with the symptoms and not the underlying cause. So similarly, when it comes to economic cycles, I think in America what’s happened is that we have become so scared to take any risk, and it’s a modern form of trickle-down economics where if any company of some consequence is failing, we want to rush to rescue that company rather than allow the natural process to play itself out. And so therefore, we have today a very distorted form of capitalism where risk has been socialized for the rich, but I’d say across the spectrum as well.

Preet Bharara:

Let’s talk further about the socialism for the rich and the bailout culture. What are the circumstances in which, if ever, in your view, the government should bail out a big business, a financial institution, or some other important member of an industry? Sometimes? Infrequently? Never? Should we not have done that in the financial crisis in 2007 and ’08?

Ruchir Sharma:

Just some background here first that before the 1980s, it was concerned heretical for the government to bail out any private sector bank. So in the research I did for the book, as I show in the 1970s, the first debates really broke out about bailing out companies, whether it was Penn Central. Or even when states like New York went into financial trouble, the reaction of the central government or the federal government was that, hey, go fix your own problems. So the culture of bailing out any private sector company or even some state entities was considered heretical right up until the 1970s. And then in 1984, we had the first big bailout of a financial institution done by the government. That was Continental Illinois back in ’84. Now, once that was done, a precedent was set. And what’s happened since then is that you’ve had bigger and bigger bailouts every time there’s been some trouble in the economy.

You had the savings in loans bailouts in the late 1980s, then you had the LTCM bailout with the Russian financial crisis back in 1998. And then we had, of course, the global financial crisis in 2008, the pandemic in 2020 where hardly anyone was allowed to go bankrupt. And then most gallingly, we had the savings and loans bailout into in 2023 where a bunch of rich Silicon Valley depositors were bailed out. And what the government did then was given implicit guarantee that no bank or institution will be allowed to fail because of the risk it causes to depositors and the chain reaction that leads to. So it’s this progression. So yes, you may need to bail out once in a while, but I think what we have seen here is this progression that once you start to bail out companies as we did in 1984, then there is possibly no going back.

And interestingly, even last year when the Silicon Valley Bank crisis happened, the moment that was bailed out, then you had a whole bunch of real estate people in the commercial real estate sector saying, “Hey, even we deserve a bailout because if you don’t bail us out, it’ll pose a big risk to regional banks in the country that have lent to us.” So it’s the cascading effect that in terms of once you do it, then there is no end to it. And then how do you prevent the average American from feeling that, okay, these big guys get bailed out by the government. What about me? How much is the government doing to protect me? And so it’s this vicious feedback loop that develops, and that is not really what capitalism is about. As I have that line in the book, which I like that capitalism without bankruptcy is like Christianity without hell.

Preet Bharara:

Can we go back to 1984 for a second so we can understand why after two centuries of democracy and capitalism, the taboo was embraced of a bailout? And Reagan was president at the time. Was there something unique about that? And if reasonable economists could go back in time, would they undo that precedent?

Ruchir Sharma:

Well, I’d say that in terms of the justification given for these things is that this financial system started to get more complex. And so if you do not bail out someone, then there can be a big contagion effect from that. And it’s also, I think that it’s this fear which is constantly raised off the fact that if you don’t do these bailouts, you can have another Great Depression. So I think that we have learned the somewhat wrong lessons in history. And so if you go back in time, I think it’s important to put this, again, in historical perspective. And if you can indulge me here for a second, I just want to take our listeners back a bit in history because I think that’s a very important historical context, which is that before 1929, for 200 years that we had capitalism, it was a very ruthless form of capitalism. And then in 1929, we got the Stock Market Crash, which then was the first stage of what led to a Great Depression, and then we started to get much more government involvement in the economy.

Now, for the first 200 years, the approach of the government used to be that it is not our job to manage the business cycle. In fact, in 1920, we had another mini Great Depression. And at that point in time, the approach of policymakers was that we should not touch this, let this play itself out on its own. And it did. So in the 1920s, we got the roaring 1920s, and it was one of the most fabulous decades ever for American prosperity, where economic growth climaxed at eight, 9% by the middle of that decade. Now, it’s the classic case of a strength taken too far becomes a weakness, which is that in 1929 when again, the stock market started to crash and the financial system had over leveraged itself, the approach of policymakers was that let this liquidate itself. And that ended up causing the Great Depression, and it was very severe in terms of what happened with the Great Depression after that. So that was the historical context.

Now, every time the stock market after that has wobbled or seemed to go down, there’s been this fear that this is another sign that a Great Depression may be coming. And in 1984, you got the Continental Illinois where a financial institution was failing. And I think that those fears were once again raised, and finally the government buckled over, but it didn’t happen in isolation. In the 1970s, there were a lot of back and forth going on about this, where the government was trying to resist the temptation to bail out private sector companies, but by ’84, you can say the dam finally broke. And then one other very important thing happened, 1987 as I said, which is that for the first time, a central bank governor intervened then to prop up the stock market. Before that, the government’s approach was to keep out of the stock market. But then Alan Greenspan, after the Black Monday crash of 1987 intervened to prop up the stock market.

And once again, then the precedent was set, and that came to be known as the Greenspan put that after that, this belief came to be that, okay, whenever the markets go down, the central bank’s there to, in a way, bail us out. So these were very two significant developments that took place which I think eroded the fundamental value of capitalism. And ironically, both of these things happened when Reagan was president.

Preet Bharara:

But people may be listening who are not experts, who are not economists. And the lesson that they take is, well, these bailouts or these interventions helped save the economy, caused the stock market in the example that you gave or other measures of the economy to improve more rapidly, otherwise we would’ve been stuck in a worse economic situation in this country. So what’s wrong with that?

Ruchir Sharma:

That’s a great question. And the way that I address it is through what I call the productivity paradox, that what’s been happening since the 1980s as well, that the productivity of the economy, if we just measure it in economic terms by productivity, growth of the economy has been declining. And as a consequence, the overall economic growth of the economy has been declining. The US economy used to grow by about three to 4% or so. Since the 1980s and 1990s, the US economy first relied more and more of debt to grow, and then eventually when it couldn’t take on that much more debt, at least on the private sector side, we saw economic growth decline. So the key to long-term economic growth is productivity growth. It’s not taking debt, it’s really productivity growth. And what’s happened in the last few decades is that productivity growth in the economy has been declining.

How does this play itself out? When you keep alive lots of inefficient companies, when you interfere with the natural process by which the economy operates, you are undermining the productivity growth of the economy. And in doing so, you’re lowering the overall economic prosperity and the economic growth in the economy. So there’s a real consequence to this.

Preet Bharara:

But that’s not a metric that gets talked about on CNBC on a regular basis. That’s not a metric like the jobs report, like the stock market, like all sorts of other things that we learn about. This metric you’re talking about is not one that’s really known. So how does it get cache? How does it get force when it’s way below the surface?

Ruchir Sharma:

So that’s the objective of writing a book like this and speaking to people like you.

Preet Bharara:

More people have to buy your book.

Ruchir Sharma:

And to illustrate the point that there are real negative insidious consequences of these things, because we in the media often tend to overplay when there’s an outright financial crisis. So if there’s an outright financial crisis, it gets everyone’s attention, whether it’s a financial crisis or if there’s ever a fiscal crisis, that what’s get everyone’s attention. The problem with productivity growth is that that’s much more insidious. It’s happening beneath the surface, as you say, and people can’t feel it tangibly unlike an outright financial crisis. So part of the job is to explain that. But the second thing is also to talk about why is there so much angst in Americans? What was the big negative of the 2008 financial crisis of the bailouts? So many people felt… The average American, at least. So many people felt unfair about the fact that the bankers and other financial institutions were getting a bailout and not really facing any consequences of that while many community banks were still failing and they were going through so much pain.

So it’s the unfairness of it as well, which I think causes a lot of societal damage. And so that’s the other consequence of this bailout culture that I speak about. So one is the productivity decline, which is much more insidious and not tangible. And so something I think for people like me to show in terms of what’s going on, why is economic growth much lower today in the midst of this incredible technology boom? Why aren’t we getting even higher economic growth and why are we getting lower productivity growth? And the second is the societal damage that these policies are causing by causing a feeling of unfairness, as I’ve argued in the book, that capitalism is not about eradicating inequality. Capitalism will lead to inequality because it’s supposed to reward meritocracy. But true capitalism is supposed to lead to at least an equality of opportunity, a feeling of an equality of opportunity.

And I think that today what many Americans are feeling is they don’t have an equality of opportunity, that the system is being run by a few people for a few people, and they’re making these decisions, which is supposed to be for the good of everyone, but really it’s self-serving and is leading to higher concentration of power and it’s distorting the capitalist system, is what I argue.

Preet Bharara:

I’ll be right back with Ruchir Sharma after this.

I’m going to go back to a question about the bailout culture and just ask you. I guess the argument is when you have a predominant bailout culture as you refer to it, and you have example after example beginning in 1984, that particular individuals or institutions will take undue risk, monumental risk, and they’ll do that because they know at the end of the day their hides will be saved. Although it still sucks to be in a position to be bailed out. There is still some uncertainty as to any particular downturn, whether your industry or whether your institution within the industry will be bailed out. Lehman Brothers no longer exists. So how much weight do you put on this incentive structure for people who want to do well and want to succeed? How much risk are they actually engaging in? I just want to test that for a moment.

Ruchir Sharma:

Of course, I’m not trying to say that we have moved to complete socialism or communism here where there’s no risk being taken and it’s complete inequality. I’m just trying to show as to how the system is being chipped away at by these policies. And so one clear demonstration of this is that how many new companies are being created and how much of the dead wood is surviving for longer? And on both those metrics, America or even much of Europe just doesn’t look that good because right before the pandemic, the number of new companies being created in America was going down. So yes, are new companies being created? Yes, but the pace of it was going down. Why? Because there was so much dead wood still in the system. So this concept that I introduced here is about the zombification of capitalism. What exactly is this?

So this term of zombie companies became quite popular in the 1990s. It was when the Japanese economy was deflating, and a lot of American commentators then wrote about how the Japanese government was giving easy money and bailing out lots of small and mid-size companies in Japan or even some larger ones because of the fear that they didn’t want those companies to go bust. At that point in time, if you look at the American media, they would mock this Japanese practice saying that this is America, we don’t do this. We don’t keep zombie companies alive. What are zombie companies? These are companies defined as companies that have not even earned enough profit to cover their debt service burden for three years in a row. At that point in time, the number of zombie companies in America was just around 2% of the total number of companies listed in America.

Today, by some measures, the number of zombie companies in America that are not making enough profit to even cover their interest expenses for three years in a row has gone up to 20% of the total. 20% of all companies in America today can be classified as zombie companies. So it’s the zombification of capitalism where gone from just 2% of the companies being classified as zombie in a place like America to nearly 20%. When you keep so much dead wood alive, you’re preventing new entrants from coming in at the same pace that they should, and it’s leading to some sort of an inequality of opportunity. So yes, new companies are being created, but as I said that the piece has gone down significantly and keeping alive these zombie companies comes at a real opportunity cost for new entrants.

Preet Bharara:

You said a moment ago that the bailout culture causes various harms, including, I think, a feeling of unfairness in the country. And there’s a different kind of bailout that’s gotten a lot of attention politically, and I wonder what you think about it or if you put it in the same framework, and that’s Joe Biden’s and I believe also Kamala Harris’s interest in forgiving massive amounts of student loan debt. Is that a bailout?

Ruchir Sharma:

Yeah, I think it’s part of it, which is the fact that in a way, it is a bailout because you’re forgiving loans.

Preet Bharara:

So this is not a bailout of the rich, but it’s a bailout, some would argue, of the slightly more privileged than not?

Ruchir Sharma:

Yes. I think-

Preet Bharara:

Is that fair?

Ruchir Sharma:

Yes, I think that’s a very fair characterization. And my point is the fact that there should be a role for the government. We can’t go back to the 1920s or the pre-1920s laissez-faire capitalism. The social fabric of the country doesn’t permit it. And as you evolve, the government should play a greater role in terms of protecting its citizens with the money. But what’s happened today is that the government is now being looked upon to play a role in so many ways, in so many sectors that it’s never ending. But once you set a precedent of bailing out someone who’s rich, then how do you deny not bailing out, in a way, the students as well? So it’s like a cascading effect that, where do you draw a line on this? I think that that’s where we are. And it seems as if that the bar for bailing out someone is getting lower and lower, as we just discussed, with what happened with the Silicon Valley Bank last year.

Preet Bharara:

There’s a feeling of unfairness also among people who work, and a statistic that I see a lot, I don’t have the exact statistic in front of me, but the multiple of what a CEO makes as compared to the lowest paid employee and what that multiple is. That multiple, as I understand it, has grown and grown and grown. Is that a reasonable metric that tells us anything helpful or insightful about inequality and the fairness of our system and of capitalism generally?

Ruchir Sharma:

I think that the fact that the ratios become so skewed is a real problem, and I think that, as I argue here, again, in the book Preet, is that this is happening at multiple levels. So yes, we focus on CEO inequality and how their income is more than 100 times the average person’s income, but it’s also happening at a company level that if you’re working at one of those really large companies, then the amount that you’re making there is far greater than if you’re working at a small to mid-sized company, and that gap too has grown. So we have inequality across the curve.

Preet Bharara:

So why does that happen? But what is different about the world today that causes that ratio to be so much larger than it was in 1975 when we were a pretty capitalistic country and most of the same rules of the road, most not all obviously, applied in 1975 as they do in 2024?

Ruchir Sharma:

So one of the things that I point to here is just our regulatory environment also, which is the fact that we have been imposing so many new regulations in place that the cost of doing business has gone up incredibly. So it’s very hard for small and mid-sized businesses in this country now to thrive and survive and so unless you are bailed out by the government or you get very easy money access. But just to put this in context, that over the last 20 years, the government has imposed 3,000 new regulations a year on businesses in general and the total number of regulations it has withdrawn are just 20 over 20 years. So we’ve been in regulatory overdrive. Now, the road to hell is paved with good intentions, so often the regulation is done in terms of in the name of protecting business or doing that.

But what’s happening here is that we are skewing the playing field in favor of the very large, the very big companies who can afford to comply with these regulations. The cost of setting up a fund in a place like New York today, I know from firsthand experience, has gone up 10 times over the last 20 years. Once that happens-

Preet Bharara:

But how does that explain? I’m sorry. How does that explain a CEO of a financial institution or a retail company making much, much, much more as a multiple of what the average employee makes? I don’t follow how regulation and the increase thereof causes that dynamic to happen, or is it something else?

Ruchir Sharma:

No. I think that there are other factors also at work, but yes, I think that the whole idea has become that we’ve become so dependent or in terms of paying a CEO, thinking that that person is going to protect the whole company and the role of that person is going to be so instrumental in navigating this very complex world that we have out there, which is partly driven by regulation, but there are other factors also which play a role out there. So yes, I do feel that there is something wrong with that too in terms of the fact that why should the CEO pay be so much higher than what the market average is for the employee? So there are multiple factors. Regulation, I think, and the complexity with which that brings, and the power that a CEO has or the responsibility to deal with that I think is partly responsible for it, but the distortions are a broader cause of inequality that we are seeing in this country that has come about.

And part of that inequality, I’ve tried, to explain is because of the fact that you also have so much amount of easy money that is available to companies today and that we want to pay our top people thinking that they are the ones who can navigate this complex environment much better.

Preet Bharara:

A theme of this discussion and of your book and of your thinking generally is this feeling of unfairness. And I think we agree that a lot of that feeling is legitimate, it’s not distorted. And one example of that is what we were just talking about, that people look at their own jobs and they think, I’m a lower level employee or I’m a middle manager. And if I don’t do a good job this year, I rightfully understand that my job is at risk and I may be demoted or I won’t get my bonus, or maybe I’ll be fired or maybe we’ll be downsized. And then they look at maybe not in their company, but maybe in their company and in other companies, you’ll see a CEO who’s making $32 million and they had a crappy year, and that doesn’t compute for them. When you’re talking about capitalism generally, or specifically what do you say to those people? Are they right?

Ruchir Sharma:

I think I have sympathy for that argument in terms of something wrong with the perverse outcomes here as to why that ratio needs to be as high as it is. And I think that there are so many things we can talk about here. Also, the fact that the difference we have on the taxes we pay on labor, and especially for W-2 employees compared to how much tax you have to pay for capital, the difference is so large. So yes, I’m not someone who’s just arguing for the fact that capitalism is working well, and I think that’s an argument which I have with some of the very classic right-wing people who don’t want any government intervention anywhere and think that the market’s just doing its job. So my point is, yes, that the market may be doing its job, but there are lots of perverse outcomes and we need to examine as to what’s causing these perverse outcomes and what’s leading to this disaffection.

But in more cases than not, the conclusion I reach is that what the government has done in the name of trying to close out those perverse outcomes has led to even bigger distortions rather than having cured the problems. So the bailouts, the regulation, the micromanagement of the business cycle. And a very classic case I want to talk about here. If I were to say as to for the average person, since we’re speaking about this in those terms, what is the biggest leading symbol that explains their angst and what went wrong with capitalism? In one phrase, it would be housing prices, that the increase we have seen in housing prices over the last couple of decades has been staggering. And that has a real negative consequence because the basic American dream is what? That you want to own your own home, but today it has become unaffordable for most Americans to be able to own their own home. Most 20-year-olds today are still living in with their parents because they can’t afford to buy their own home.

The old thumb rule used to be that if you’re spending more than 30% of your income on housing, that’s stressful. That used to be the case that most cities it had become unaffordable by that thumb rule. Now, across the nation, it’s become unaffordable because housing prices have been galloping higher. And I’ve detailed in the book why is that happening in terms of that. And the biggest reason is that there’s such a shortage of supply of new homes, that the most staggering statistic I heard there was that the number of new homes we’re creating in the country today is roughly the same as the 1950s even though our population has doubled since then. So that’s really amazing. So the supply of new homes coming on is so low, and the reason is because it’s become so hard to build a new home due to the number of regulations and the coding laws, the zoning laws, the NIMBYism. All these factors are leading to a dramatic shortage in the supply of new homes coming in.

And the people who own those homes are quite happy to see the prices rise and feel good about it, but for new people looking to buy a home, this regulatory overkill in the housing market across the spectrum is what’s pricing them out of the home market. And I think it’s the leading reason why so many people today, and so many young people in particular, today are disaffected with the capitalist system and feel that maybe socialism is better. But again, the answer here is not more government, but it’s look at what can we do to ease these supply shortages? What can we do to build new homes so that people can afford them again? Because the obvious thing when you have high prices is that supply should increase, but we’re just not getting an increase in supply despite these very high prices.

Preet Bharara:

Look, my own personal experience in Manhattan as a young lawyer, when I was 28 years old, I was able to buy a one-bedroom condominium in an excellent location in Manhattan for $180,000, and I had a decent salary. That condominium, I’m guessing today is 1.5, $1.6 million, tenfold increase. The starting salary for a very well-respected and credentialed young lawyer has not gone up 10 or 11 times. It’s gone up three or four times. So that’s one slice of a very privileged community in the workforce, but you see that everywhere, and it’s probably much worse in other sectors as well, right?

Ruchir Sharma:

Yes. So in fact, today, just to put some stats behind it, that since 2000, the average household income has doubled, but the average price for its listings has tripled to 360,000. The time it takes to save a 20% down payment has risen by nearly half to 11 years, and the share of income that goes to mortgage and insurance payments has risen more than a third to 35% in the unaffordable zone. So across the spectrum, we have seen home prices go up significantly, making people feel that it is unaffordable. And that is the source of so much angst. And something I don’t find enough discussion of, even in this election campaign so far, I’m happy that at least Kamala Harris is beginning to talk about it, but the irony which I find is that Donald Trump is a builder, and yet there’s been very little focus on, okay, what do we do to ease this housing shortage in this country and bring prices down to more reasonable levels so that the average American can afford to buy a home again,?

Preet Bharara:

That’s a good pivot and segue to politics. These problems we’re talking about, one level of solution for them is political leadership. We’re in the throes of a very competitive, very tough, very difficult, historic and unprecedented election, and both candidates are playing on this issue we’re talking about the feeling of unfairness. So Kamala Harris has endorsed this plan or suggested this plan that she says will do away with price gouging. Lots of people, including people in her party think this is a not good idea and amounts to price controls and is antithetical to what the economy should be like. Do you have a view of this rhetorically and substantively?

Ruchir Sharma:

I think that this is rhetoric. I think that we have tried a form of price controls as [inaudible 00:45:28] back in the 1970s. That didn’t exactly have a great outcome. So I just don’t take this talk very seriously because I just feel that when she’s in power, it’s going to be very hard to implement this. And we know what the experience like-

Preet Bharara:

So why say it? Because it has resonance among people who think it’s a good idea and are not sophisticated? I’m trying to understand the politic calculation here.

Ruchir Sharma:

There are lots of populist lines going on in this campaign. So Kamala Harris, like you pointed out, we know Trump talking about tariff increases. I think most economists will tell you that’s a bad idea, but that doesn’t seem to stop anyone from-

Preet Bharara:

Well, Trump says tariffs are just a tax on the other country.

Ruchir Sharma:

Yeah, I know, but whatever it is, what the consequences of that is for inflation, particularly when inflation has come back in some way over the past three to four years. And once again, he talks about tariff increases, but in the end, whether it’s going to actually do it or use it as just in negotiating tactic, we just don’t know these things. I think that unfortunately this campaign has been very light on policy specifics, pretty high on these type of populist lines. And I think that the biggest risk to me, and this is something we haven’t spoken about as yet when I look at the politics, is that both the candidates are talking as if things like debt and deficit and all just don’t matter. I think that’s the level of arrogance we have reached in America today.

Which is that talking about, okay, what is our debt? What is our deficit level is considered to be so passe that all these guys have been scared mongering about this ever since that clock came up in Times Square, which used to show as to what our debt level is. And here we are 30 years later, nothing has happened, so we can keep talking as if we can cut taxes. One side says, the other side says, we can just raise spending and it doesn’t matter. What’s changed, of course, is that now we’re running a budget deficit as a share of our economy, which is 6% of GDP. There is no other country in the world which is a deficit as large as this today. And similarly, when it comes to the American public debt level, it’s now crossed 100% of GDP, and by the end of this decade, the only country in the developed world which will have a higher debt to GDP than America will be Japan.

So we are heading down that direction, and there is this arrogance that we can spend or cut taxes. And it really doesn’t matter because we are the world’s largest economy, we have technology, we have AI, we have the world’s reserve currency, where else will the money go? It’s bound to come here. I think that that’s a very complacent and dangerous attitude to have and I suspect in the next year or two, especially whoever the new president is, I think is going to be tested on that because I think that the investing community in particular and bond traders will possibly come back to ask the question, okay, what’s your plan? Or is this your way of being?

Preet Bharara:

There seems to be, maybe I’m missing something and this is not right, but an inherent paradox in some of this conversation. On the one hand, people have a negative attitude and are pessimistic and have a pessimism about their future and about becoming as prosperous as their parents and have negative feelings about home ownership. And so a lot of negative feelings. On the other hand, when it comes to debt, as you’ve just mentioned, there’s a feeling of just general optimism that we’ll figure it out and we’ll get it done and we don’t have to worry about it. How do you reconcile those two things?

Ruchir Sharma:

So I don’t think it’s about optimism. It’s just in terms of the fact that people are just oblivious to it or just don’t want to talk about it because-

Preet Bharara:

So it’s head in the sand?

Ruchir Sharma:

It’s because of the fact that they feel that we have heard this narrative before and the scare mongering before, and it’s not really led to any obvious negative consequence. And the second reason I think, is because any reform required there is going to be painful, whether it’s tax increases or spending cuts, and nobody wants to endure any pain. As we discussed at the top of the show, that that’s one of those features of American society, that any approach to pain management is to say, okay, we just deal with it at the surface by treating some of the symptoms, but the cure is not what we’re in here for. So I feel that it’s not so much of a contradiction, but the fact that people are looking for new ideas, new solution across the western world, I feel, that’s partly also feeling populism, but of the wrong kind and for the wrong reasons.

But on debt and deficits, I feel that nobody wants to really deal with it because they know that any solution will involve at least some short-term pain. So as long as we can carry on this way, let’s just keep rolling. And that’s the nature of countries around the world, that only when you get an outright crisis do you see change take place. That’s what Greece had to do like a decade ago when it was forced to restructure its debt. Similarly, in the past, countries like Sweden and Scandinavia where government spending rocketed to 60 to 70% of GDP and they ran into a crisis in the early 1990s, only then did they reform themselves. And they reformed themselves in such a dramatic way, in fact, that Sweden, which is often hailed as this great poster child by a lot of progressives even here, by 2007, 2008 when the global financial crisis hit, Sweden was lauded for the fact that it was running a budget surplus by then. So it’s only when it faced an outright crisis was even a country like Sweden forced to roll back on its government way.

Preet Bharara:

Well, we had a crisis in 2008. It’s called the financial crisis. What did we fix?

Ruchir Sharma:

Unfortunately nothing. Because what did we do? We just decided that we’re going to spend our way out of it and we’re going to bail companies out. And luckily for America, after that, two things happened. One, we had this great boom in technology and in Silicon Valley. Two, we had fracking and shale oil, which is what also led to a boom there. So those two things are what helped America be the comeback nation, something that I wrote about a lot that decade. And the second thing happened, was that some of America’s main competitors fell by the wayside. Europe, for example, has done much worse than America. And as I’ve argued in the book that capitalism is in much worse shape in Europe. And the second very significant development is what’s happened to China, that China was seen as the biggest economic competitor, but under the weight of its own debt and demographic decline, the Chinese economy has been doing quite poorly in the last few years.

So both those things have made America on a global basis look somewhat better because its competitors have done worse, not because America by itself has done much better. Though of course, America had the tech boom to thank for the fact that its stock market and its economy have done at least somewhat better than those economies. Even though in absolute terms, I think the performance still remains subpar and the average American doesn’t think of things that way. They look at their daily finances and they are still feeling quite down about it.

Preet Bharara:

What do you make of the democratic plan to tax for certain high wealth individuals unrealized gains?

Ruchir Sharma:

Again, very hard to do, but I think I have a fundamental issue here, which is the fact that I feel that in terms of that, yes, something needs to be done where so many loopholes need to be closed for the billionaires who are evading taxes and the capital gains that they’re paying. Something needs to be done about that, so I have some sympathy for that argument. But one thing which I am fundamentally opposed to is that I don’t think that any individual should be asked to pay a tax rate of more than 50% of their income because in a way, then you’re practically working for the government. So I think that what’s happened in this country is that if you are rightfully paying tax person, but you’re paying it through your W-2 and you’re making a high income, then you’re taxed disproportionately high. But if you happen to be making your gains through capital, or if you are a very rich person like a billionaire and know how to dodge the taxes and stuff, then you’re able to get away with that.

So I think that the discussion here needs to be a bit more nuanced, but the fact of the matter is that I don’t feel any individual as such should be paying more than half their income in taxes. And many states in America, including New York, including California and stuff, are well past that 50% threshold. And so therefore, in America too, we are seeing the great migration take place to the south and other states which are willing to allow for lower tax rates for them. So in a way, the market mechanism is working here by leading to this great migratory flows in America.

Preet Bharara:

Here’s another one that I understand was first proposed by Trump, seems to have been also mirrored by Kamala Harris, no taxes on tips. Is that a reasonable policy? Is that pandering in the view of some? Is it silly? Is it a gimmick? Is it a real thing?

Ruchir Sharma:

It’s a gimmick, but again, it touches upon the populist chord because the moment it was done by someone, it ended up being popular and so it was done. So I think that we are in that era of competitive populism. And on some of these economic issues, we’re getting some agreement surprisingly, whether it’s on the anti-China, possibly on tariffs as well because Biden didn’t do much to change that. And then on these gimmickry stuff like taxing on tips and that’s not being allowed. So I think that that’s the way it’s being done, but that’s the culture now we seem to have gotten, which is that every time anyone speaks against any of this, the comeback is yeah, but if you’re bailing out or if you’re making all these policies for the rich and who are getting so many benefits, how could you prevent me from getting it at my level? So that’s the kind of negative feedback loop we seem to have got stuck in now.

Preet Bharara:

So what would be the difference in economic policy, principally the main differences, ’cause there’s some overlap in rhetoric, as we’ve been discussing, between a Trump presidency and a Harris presidency?

Ruchir Sharma:

At a very broad level, I think that under Trump you’re likely to get somewhat lower taxes, and under Kamala Harris you’re likely to get higher spending. But what concerns me the most, and I think that this will be a big issue next year in 2025, is that I think there’s going to be much greater focus on the deficit number because under both their plans, I see the budget deficit blowing out further. And I think we’re already in unchartered territory, and next year the new president, whoever comes to power, is going to be severely tested, I think on that front. Because you’re running a budget deficit today of 6% of GDP. If there is even a mild economic downturn or recession, that number will explode to eight to 9% of GDP. Are we really going to be able to sustain that? Who then is going to be able to pay for welfare and other programs and schemes once you’re already running such a large budget deficit?

So I feel that something’s going to give by next year where the bond market and other people are going to test these promises and possibly force them to restrain some of these spendthrift ways.

Preet Bharara:

Does the stock market change appreciably under either presidency? Opponents like to say, and they were all wrong. Trump says, “If I get elected…” And back in 2016, he says it again, “The market will go through the roof. If you look Biden, the market will tank.” Same with Kamala Harris. All of those predictions turned out to be false. Is the stock market relatively independent of who is in power politically in the White House?

Ruchir Sharma:

Yeah. That’s what my research has shown in fact, which is that whether it’s a Democrat or a Republican, the gap is not much. But here’s what matters, and I think that this is a global finding and something that I’ve found as well that typically the stock market does better under the first term of a new leader and much worse in the second term. So I think that for me is a very important distinction out here, that you need fresh ideas and the market typically does better when a leader is willing to tackle some of the crises out there. So if you look at the reaction too, and it’s amazing that we’re all consumed here by politics and everyone’s got their opinion on who’s going to win or not win and what the chances are, but the market hasn’t paid any attention to it at all. The market’s more focused.

Preet Bharara:

It just wants to go. I guess in the last couple of days we’ve had a pullback.

Ruchir Sharma:

Some pullback.

Preet Bharara:

But we had an episode on the podcast a few weeks ago and we titled it The Great Recession of August 5th, 2024, and there was a lot of silly attention being paid to one or two-day changes. Fair?

Ruchir Sharma:

Absolutely. And I think that it’s great you brought it back because to me that August 5th episode showed you as to what all’s really gone wrong with capitalism, going back to the title of what we were discussing. Because that day the market crashed, you had these commentators come on all these financial channels and say, “The central bank, the Fed needs to cut rates immediately.” So after a long bull market, we get a one-day decline in the stock market and we get this reaction that you want the central bank to come out there and slash interest rates and rescue the market. That’s really first when we exhibit A of what has gone wrong with capitalism, that why should the Fed or anyone care about a one-day market decline?

Preet Bharara:

Ruchir Sharma, thanks for being on the show. Congratulations again on the book, What Went Wrong with Capitalism? Hope we get to talk again soon.

Ruchir Sharma:

Enjoyed that, Preet. Thank you.

Preet Bharara:

My conversation with Ruchir Sharma continues for members of the CAFE Insider community. To try out the membership for just $1 for a month, head to cafe.com/insider. Again, that’s cafe.com/insider.

Before we end the show this week, I want to take a moment to acknowledge the horrific news over the weekend about the six Israeli hostages killed in Gaza. Among them, 23-year-old Israeli-American Hersh Goldberg-Polin. You may know Hersh’s name. He became one of the most recognizable victims of the October 7th attack when 1,200 Israelis were brutally killed and about 250 taken hostage. Hersh was kidnapped from the Nova Music Festival. His parents, Jon and Rachel, have tirelessly for almost a year, pushed and pleaded for a hostage deal to bring their son and all the hostages home and to end the war in Gaza, which they said had innocent people paying the price on both sides.

As the war rages on with tens of thousands of Palestinians killed and 95 hostages still held captive by Hamas in Gaza, it is abhorrent and heartbreaking what so many people are going through. No family, no person, no people should ever have to endure this measure of violence. In times when it all seems too much to bear, I try to talk less and listen more. And in that spirit, I’d like to share the deeply moving words of Hersh’s mom, Rachel. She spoke at her son’s funeral in Jerusalem, which thousands of people attended on Monday. Here is some of her powerful speech.

Rachel:

I have had a lot of time during the past 332 days to think about my sweet boy, Hersh. And one thing I keep thinking about is how out of all of the mothers in the whole entire world, God chose to give Hersh to me. What must I have done in a past life to deserve such a beautiful gift? It must have been glorious. Hersh and I once watched some documentaries a couple years ago together about young people who had died and he commented, “How come everyone who dies young is always said to be the funniest, the smartest, the greatest, the handsomest? Why doesn’t anyone ever say I liked Max, but you know what? He was pretty stupid and his sense of humor was off and he had bad breath?” I am honest, and I’d say it’s not that Hersh was perfect, but he was the perfect son for me.

For 23 years, I was privileged to have the most stunning honor to be Hersh’s mama. I’ll take it and say thank you. I just wish it had been for longer. Hersh, for all these months, I have been in such torment and worry about you for every single millisecond of every single day. It was such a specific type of misery that I have never experienced before. I tried hard to suppress the missing you part because that, I was, convinced would break me. So I spent 330 days terrified, scared, worrying and frightened. It closed my throat and made my soul throb with third-degree burns. Part of what is so deeply crushing and confusing for all of us is that a strange thing happened along this macabre path upon which our family found itself traveling for the last 332 days. Amidst the inexplicable agony, terror, anguish, desperation and fear, we became absolutely certain that you were coming home to us alive, but it was not to be.

Now I no longer have to worry about you. I know you are no longer in danger. You are with beautiful honor. I pray that your death will be a turning point in this horrible situation in which we are all entangled. I send each of the families my deepest sympathies for what we are all going through and for the sickening feeling that we all could not save them. I think we all did every single thing we could. The hope that perhaps a deal was near was so authentic, it was crunchy. It tasted close, but it was not to be so. Those beautiful six survived together and those beautiful six died together, and now they will be remembered together forever. At this time, I ask your forgiveness. If ever I was impatient or insensitive to you during your life or neglected you in some way, I deeply and sincerely request your forgiveness, Hersh. If there was something we could have done to save you and we didn’t think of it, I beg your forgiveness. We tried so very hard, so deeply and desperately. I’m sorry.

Okay, sweet boy, go now on your journey. I hope it’s as good as the trips you dreamed about because finally, my sweet boy, finally, finally, finally, finally you’re free.

Preet Bharara:

Well, that’s it for this episode of Stay Tuned. Thanks again to my guest, Ruchir Sharma. If you like what we do, rate and review the show on Apple Podcasts or wherever you listen. Every positive review helps new listeners find the show. Send me your questions about news, politics, and justice. Tweet them to me @PreetBharara with the hashtag #AskPreet. You can also now reach me on Threads, or you can call and leave me a message at 669-247-7338. That’s 669-24-PREET. Or you can send an email to letters@cafe.com. Stay Tuned is presented by CAFE and the Vox Media Podcast Network. The executive producer is Tamara Sepper. The technical director is David Tatasciore. The deputy editor is Celine Rohr. The editorial producers are Noa Azulai and Jake Kaplan. The associate producer is Claudia Hernández. And the CAFE team is Matthew Billy, Nat Weiner and Liana Greenway. Our music is by Andrew Dost. I’m your host, Preet Bharara. As always, stay tuned.