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tv   Book TV After Words  CSPAN  August 13, 2012 12:00am-1:00am EDT

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>> congratulations on the book. it's unintended consequences and it's got an lot of attention for your ideas. it's quite provocative and interesting. what motivate you to write this book? >> guest: i felt like i had something to say, and maybe i was frustrated with what i heard in the media about the economy on both sided of the debate, and felt that it wanted to try my hand at craving it and i felt like i needed to make my
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contribution as best i could, as i had done at bain y'all capital. and needed to try to do something that was important. so i. >> host: you mentionedbay capital. a lot of interesting thoughts and interesteds in this book. maybe you can tell me where these ideas come from? are these ideas that developed over a long time from your career in finances and work at bain what you think about the economy? >> guest: it evolved from debated i had from young kid was who came to work for first bain consulting and then bain capital, who wanted to argue economics and politics, and i kept saying when you get to be 40-45, you'll become conservative, and i think it evolved from that. i also benefited greatly from a friendship i had with bruce, a professor at columbia, who i was able to make my arguments to and
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he would frequently say, right on this, but you're stepping on a land mine here or there not to say he a agrees with everything in the back but he helped me sharpen up my understanding of economics. but that really the source. and part of it came from my experiences at bain consulting and bain cap a tall. bill bain taught us that almost all the value created by businesses is captured by the customer, not by the investors and the investors only capture a very small piece, which is there advantage relative to competitors, and businesses in a race to deliver more and more value to the customer and that the competition keeps you hospital in delivering more and more value and you're only capturing a very small piece of that, and that plays into the economics that underlies the thinking of the first half othe book. >> host: so, tell me if this is a fair characterize craig. felt like there were two real
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distinct pieces to the book. one looking at the financial crisis, and one this larger view that wowyear just referring to about how the broader economy works. let's start with the second one. i wonder if you could just -- what makes an economy grow? what are most important things? >> guest: well, i suppose that goes to robert solo. investment per employee would be one. education would be the second. and i think in tech on the job training, has been my own experience, and innovation being the third. the more of that you have their faster the economy grows, the higher the incomes will be. another way to think about it is, how much equity do you have that's -- that you at least think you have, and your willingness to take risks and put that equity at risk to underwrite the risk that grows the economy and creates jobs, and when you are in, say, 2007, and believe you have a lot of equity you consume a high share of your income and make risky
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investments say rather than working capital and responding to growth and those things drive the economy, and that after the crisis, when real estate prices dropped 30% you believe you have a lot less equity, probably have a lot less equity than you realize so you reign in risk taking, and economic activity contracts to adjust for the amount of equity you have. you start serving -- saving to compensate for the less equity you have. you feel less comfortable taking risks. that's on a macro level what makes the economy run on a short run, and the long run, it's back to robert solo and the investments your making is driving the growth rate in the long run. >> host: you referenced this current situation we're in. what -- and you're focusing on the availability capital of the level of i can witness you have. where does demand fit into this
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picture? currently -- a lot of people focus on the debt overhang of the middle class, and the lack of demand as the reason they're not investing, not in that -- if you read the business press, if you talk to business people i talk, to that's what i hear more than lack of capacity to investment. >> guest: i believe that demand is a symptom, it's not a cause. the underlying cause of demand is the amount of equity that people have. so home owners, particularly the middle class, who had almost all their financial investment in theirs house and now the house is down 30% and. heed heavily so they dialed back their economic activity in their case chiefly consumption, and they try to accumulate defender consumption as way to increase their equity, and that causes demand to decline. so, i think when you think about
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the problem this way, i think you say, gees, any money i take from one person to give to another to increase that other person's demand, will be offset by a reduction from wherever the money came from, and so the keynesian multiplier effect, you're much more skeptical of that, and what the size would be, and you tend be more on the -- lack of a pet are word -- rational expectations camp that people will look at the total amount of risk being taken and will make intuitive reduction as the government tries to increase and they'll offset with a decrease. >> host: one of the things you emphasize is this -- particularly in the longer term discussion -- is the importance of taking risks and the importance of eninnovater risk, investor risk. talk about that a little more. i thought that was interesting, the role of risk particularly, and willingness and able to take risks to make the economy grow. >> guest: i make the argument in
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the book that payoff for risk-taking drives the amount of risk are taking we get and it's probably true if we increase the tax rates we won't get a rapid contraction in the amount of risk taking but that is a compounding effect that can grow over time. if we stop investing this year, it's not a like the economy would clamps it would gradually slow down over time. and so higher payoffs for risk-taking, one is that they increase the bar for success. the united states, the most talented people work longer hours, and their counterparts in europe and japan work fewer hours and in the rest of the economy, as people have grown richer they have a reduction in the amount of work they've done. so that's one of the things happens. keeping up with the joneses. that work effort and the risk-taking it represents creates companies like google and facebook and countless other companies, innovations that we have enjoyed in the ute, more
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than in europe and japan and that creates valuable on the job training for most talented workers, and so, again, you get that training, it increases your probable of success, a network of engineers and business people who are familiar with what's going to be successful in the internet, for example, all located in silicon valley, has a mag any -- magnifies they payoff and increases the probability for risk-taking. and the third is success puts equity in the hands of people who are willing to underwrite the risk that produces innovation, and those three things gradually build over time and we end up with an economy that grows faster, higher median wages, growing employment, chen europe and japan have enjoyed over the last two decades. >> host: it seemed like in the book you talk about different kinds of people who take risks, and one of the groups, i guess, what i'll call the innovators, the people who start these businesses. the people who -- i know you
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talked about the people who take the risk of leaving a security employment, leaving going toll start the knew thing, the big thing, and you focus on increasing the payoff for that, basically. and kind of -- your argument is for lowering taxes and stop me if i'm mr. characterizing but for lowering the tacks on that payoff. and i think one thing i thought, in thinking about that, that i thought was interesting, was that i've known people in that position. i used to be involved in technology, and i know google people. my father, actually, who made a choice like this. and sometimes asked me for advice, and we've discussed it. what i thought was interesting to me was some of it is they just have a cool idea and they want to go explore it and want too do something different, and it's exciting. some of its definitely they're looking at the possibility of life-changing wealth.
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that's definitely an attraction. but i must say, at least in my experience, like if at it life-changing wealth, if it's 10% more or 10% less, that isn't a big difference to them. do you think in that situation that sort of the difference in like the range of possibility tax levels is a big factor? >> guest: i think we know before the fact, when mark surgerier berk took i wasow know he didn't expect to be as wealthy as he is. so he took a risk for a lower payoff, and it's hard to argue with that. but i think thomas edison said, success is 1% inspiration, 99% perspiration. business is a team sport and if you look at something like google or facebook, the team, the size of the team you really needed to make facebook successful when nye space didn't succeed and other things didn't succeed, takes a lot of money and you have to lure a lot of
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people away from a lot of google and other companies to be successful. and facebook says we can't afford to give equity to guy sitting in any dorm room to create the value that needs to be created. you seek at yaw how much those invests cdsed they need to lure a leader a. from google not only because of that one person, but because that represents a certain alignment with the shareholder about what is going to create value for that person and for the company in general, and the team that you can assemble to be able to do it. so, some board of directors decided at yahoo that was the place to get the person that could really bring the entire team together that could make that company successful. i'm not trying to argue whether it was a wise decision or not, but i think every day, shareholers and investors and board of directors look at the very economics you're
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describing, and do come to the conclusion, even when -- we're not talking about entrepreneurial risk taking in advance of the outcome. these are the things they need to do to make companies successful. so i think the argue. is a little bit like, if he lower the incentives a little bit will it have a big impact? in the short run i won't but in the long run they compound, as i described. you look at the europe versus europe and japan. 26 of -- california created 26 of the top 500 largest companies in the world. europe has created one during that time frame, back to then 19 # -- 1970s. if the payoffs don't matter, why isn't europe and japan able to produce the kind of employment and meddle class median wages the u.s. economy has produced? often people say, it's just -- -- we have entrepreneurialism
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our blood. but we didn't dough our economies faster than their economiesen in the commercialization of the internet. if anything our productivity was slower and moved from 1.2% a year growth rate up to 2%. one and a half of those two paints are coming from innovation. theirs moved from one and a half to two to one to one and a half. i just don't think that god blessed america with entrepreneurial blood. i think we earned it the old fashioned we. we worked hard and tookmer risk and made more investment if you counsel the salaries of thinkers and innovators as part of what investment is, which our economy doesn't count as investment but other economists made those calculations and we're investing significantly more. i think we earned it. >> host: the policy differences you point two between europe, japan, and the united states, certainly predate 1990. so why do you see the divergence starting then?
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>> guest: i believe that in part i think we were able to capitalize on the internet and that unleashed a level of innovation. they were not in a position to capitalize inch the book i argue that roe v. wade changed the equilibrium in politics. ed mate the religious right stronger politically and they in the reagan administration lowering marginal tax rate, opened up the trade borders and those things led to higher payoffs for successful risk-taking and that compounded over the course of 25 years to create the differences that we see today. >> part of it, i'm sure, is circumstances circumstances and luck as well. it's hard to know what all the different factors are, but certainly i believe that starting a company in the u.s., you see it, google, facebook, ebay, amazon, adobe, cisco.
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why have no companies been created in europe and japan along those lines? you just dope see it. >> host: one thing you mentioned earlier and is prominent in the book you call it on the job training but i think of it as a cluster. you get a cluster of businesses that sort of build up momentum so you have -- those companies have a lot in common in terms of the industry they're in and -- i mean, that cluster was forming in california in particular during that time period, and you make the point that it's sort of -- it set on itself. so part of this is getting at the root of why did that form? and other clusters in the history. the research try ang until north carolina, route 128 around boston that sort of thing do you have any thoughts on what created that cluster in -- that got those companies going? >> guest: i mean, i think in part it's early success.
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for some seed -- microsoft, for example, intel, scratch your heat and wonder why clusters didn't occur in europe, clusters didn't occur in japan of this type. i also think that people in america really were driven to, i'm going to get a software degree or mba and go out to silicon valley and get a job at one of these companies and walk away from the job and try to create something new and innovative. because the window of opportunities has opened. i believe the internet -- one thing that's left out of the equation of economics is what does the structure of up realized investment opportunities look like. i think the internet opened up a unique set of opportunities for us that were much more ontrol trip neural and innovative and took a lot of talent and thinking, if you will, that produced capitalize on what opportunities we had available to us. why it didn't occur in europe and japan?
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i think in part just weren't motivated to say, i'm going to take the risk. when you look at it, our people were walking away from companies like intel, and microsoft. what were the europeans and the japanese walking away from? the japanese had lifetime employment so maybe it's risky for them to walk away. the europeans, especially young europeans, had very high unemployment rates and pretty poor growth prospects for their careers. they weren't even walking away from anything that was that risky, and till people didn't go to europe and say, i'm going to start my startup there because look at the pool is rearview mirror and there aren't many competitors chase offering the talent in that pool. they went into the united states because i think they just thought the opportunities, the ground was more fertile and the chance for success were higher. >> host: one of the reasons the ground was more fertile, it helps we have some of the best universities in the world, and particularly in the research area and a lot of the algorithms that ended 'underpinning this
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came from actually government research grants, the department of defense, which always wants to be at the very cutting edge of technology. we had the internet was originally a way for government scientists to communicate with each other. i think that's clearly that basis is one of the big reasons silicon valley got started and we sort of had this critical mass and created the firstle ground -- firstle ground and on the job training that helped us. >> guest: i would say it's possible. but i'm skeptical. when you think about the internet, think about the commercialization that's occurred 1eu789sd 92 or 1993 when they came up with the browser. almost all of that has been done by private enterprise, very little done by the government. and so the second is -- i don't know about you but when i think back to what i learned in school, all learning occurred on
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the job. it's highly specialized and you really learn by doing over the course of your career very little of what you're taking from school is, that's what made me successful. aside from the fact that you're a capable student, and is important to earn, and when you look at the u.s. universities versus the european or japanese universities you don't see big differences in what an undergraduate student is receiving from those universities. i think you see small differences. they don't seem large enough to account for the big difference in success in the u.s. versus europe and japan. so i look and say it's probably some of the contribution but i see it as small, not large. and if you look at where the innovation has come from, it has not come from r & d and science base -- fill science based breakthrough. most is from commercialization of the internet, which is not as scientific and research based as
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what we typically think of as a curing in universities. >> so i have a degree in electrical engineering and look what what i'm doing. i vaguely remember the three law s of theme he dynamics. >> guest: my point is less the undergraduate -- i take your point about the coercialization and browsers and all that, definitely private. occasional borrowings for more research. my point is it seemed like a critical element was just -- was the kind of critical mass of people out there, and there were -- the guys who founded google were guys who were getting their ph.ds at stanford, and they developed an algorithm out of their training. >> guest: math students. >> host: and just the fact that you did have people working on
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systems engineering, and it's not the undergreat but -- undergraduate but a government funded dod research networking capables and all that. its up provable but there's a story that the critical mass that kind of cubed itself was built up out there and if you want an explanation for why it happened here and so little happened there. >> guest: one thing i would tell you is this. leading up to 2000, when we got the peak of the internet values, people who worked they'ver who lives to gate job at bain were walking out the door with the cookiest internet ideas, trying to get rich. it was hard to get'em to stay at their place of employment, and i knew some prefers who described it as everybody has a business plan, it's an incubator for internet ideas.
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those valuation had an enormous impact i saw on talented people and their willingness to take crazy risk, and you see that i thing as well in state lot riz. whenever the jack pots -- it doesn't increase the value but the high payoff has everybody out there buying lottery tickets, and you see it in education. who are the students working the hardest? they tend to be the honor students where a mall amount of working lead to big differentiation in their success. and the credential they earn. what found at harvard business school, the guys in the middle went, if i work harder, only in the milled and i'm going to play tennis. the gee at risk of failing they were working hard, going, if i work harder it could have a impact on whether i stay 0 are go. so when the payoff got large relative to amount of work i observed a very big difference in the amount of work that people were willing to do they risks they were willing to take,
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crazy risks leading up to 2000. >> host: i would say the business school population is particularly not -- the way it comes to team support you find those businesses who are motivated to get rich. they're carrying lot of the party on the team that make those companies successful in the trenches of we have this myth it's two guys in a dorm room, they crack the code and it falls into place and you end up with facebook. you don't see friendster and myspace and the twins laying on the side of the road, not having achieved success. it seems debatable how original the idea of facebook is and envelopes it's the one that prevails for more than just a guy in a dorm room with a good idea. >> host: let me just -- going back to europe for a second. and japan. i just -- i -- you look at this
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20-year period. there were other things going on. japan was dealing with the asian debt crisis, europe was absorbing eastern europe so in terms of the aggregate -- >> we were in mexico. >> and did a better job. keep going. >> host: now i understand what you're saying. the -- i mean, i just think in terms of the aggregate growth numbers, more complicated story than we had more incentive, more -- lower taxes and less regulation. but we -- >> guest: since 1990 increased the total hours worked about 12%. europe, france -- because northern europe, southern europe, the left always wants to pick the north, the right picks the south. i pick germany and france. i think france is essentially
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flat during that period. germany is down four or five percent. japan is way down, 10-15 percent, in total hours worked and it's not from a lack of people. we have 25 to 30-35% more hours per working age adult than they do. and it's not that, oh, gees, they all wanted to go out and take vacation. you can take vacation here if you want to there are usually restrictions on the number of hours work, appealed the work over more people, and if it was just a matter of vacations you wouldn't see in 2007 when u.s. unemployment was essentially zero they still had very high up employment of their young people. you'd think one place where you want low unemployment is young people entering into your economy are go to take it on -- take [overlapping speakers] the next 50 years. so they got to look and say something bad was going on there something that, if you had your druthers, i don't think you would pick that.
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>> japan i think it is -- actually there i would point at something called -- women not working in japan. i think i would point to something like that. i share your skepticism of overly broad assertions based on culture but in japan it's a fair argument. i do think also that we can take vacations here but they also -- they have laws. they have made conscious societal choices as they become wealthier economies, that part of the return on that success is they're not going to work as hard. >> guest: i would interpret that as a different way. they're not voluntary. they have laws. it's not voluntary vacations. it's spreading a lot less hours over more people to get the people employed with the hours they have. and you can always take a lesser career here and more vacation and lower pay if you choose.
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our pay is 25% higher on the immediate yap wage so we were able to grow and get more hours and more employment even with higher wages, and you drop back to 1980, on the base of 100 million employees, we created 40 million jobs. half of the jobs were at the highest end of the wage scale, and which only 25% of the jobs in then 1980s were at the highest end of the wage scale. so it's not like we hand a nation of hamburger flippers. we brought 20 million immigrants into our economy. peek talk about outsourcing? there was insourcing over the last 25-30 years. we created jobs for families. we employed their children, we employed tens of millions of people offshore. it's hard to make the case that the must economy hunt den more for the middle class and work poor than any other high-wage economy. even if you look at, say, wages or income per employee, perhaps we could have restricted the amount of employees who came into our economy as a way to
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push up the wage rate per employee, about we just grew the total amount of hours and income and increased the amount of employment relative to europe and japan -- we can debate -- go back to germany and france this the two most comparable comparisons and they're very different economies and different outcomes as well. but -- >> host: we'll take a break right now. >> host: you obviously attach a lot of importance to investors taking risk. you think it's an important part of drawing talent into the
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important new industries and i wanted to -- could you paint a little bit more or a picture how that works? you talk about the tax rates matter a lot to whether wealthier people are willing to take these kind of risks and make these investments. are talking about wealthy lawyers, doctors, and accountans and lobbyists or what? can you walk me through, what are the choices they're making that matter for the economy and how are their tax levels affecting those decisions. >> guest: it's a very complicated question. i think most of the productive investment is being done by business, of which your doctors and lawyers are buying the equity of those companies. so it's happening indirectly. the question is, what's their tolerance for risk? are they willing to let those companies make long-term investments for the future or do they -- are they risk averse and
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would rather invest in debt instead of equity, rather get a steady stream of income because they want to consume that income in the short run version say, not consuming it for quite a while. so, the question becomes, how do their demands get translated on to the managers of companies? and so if you're paying disdepends, it is going to make your stock go down or if you withhold the cash and hold on it to, will you make your stock go union see the microsofts of the world and googles, they say we need to hold a lotf cash because we're insenting entrepreneurs to get that cash by creating the next instagram or whatever experiment will lead to something we will value and that we'll use our money, which is really the shareholders' money, to buy what emerges as successful or begins to emerge as successful. 0 so the linkages are not linked
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directly from the shareholder to the veep tire capital. it occurs indirectly through a series of links but i think managers -- what you see, are they responsive to shareholders in the u.s., much more options than there has been in europe and japan. it's changing over time. which inscent the management team to take the steps necessary to increase value0s of shares. putting a lot more bonuses in place in the u.s. because my experience in business is that managers are risk averse. the value of their career is high and if they take a loin risk and it fails, they often lose their job and they ever get back into the game at the level they're at. so, gees, come in and be the crowe of that company. that rarely happens so they tend to be risk averse and think more about their careers, want to minimize the amount of risk they're taking because they don't want to put their careers in jeopardy and it takes
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shareholders and boards of directors and incentive systems to push them to take the risk, and it's a question of, what do the shareholders value? the linkages are admittedly indirect. the second thing i think that occurs is what risks are the willing to underwrite and how are they valued. >> host: what risk? >> guest: invinceor ithink of investors in modern finance, the funding part and then the risk underwriting part which looks like an insurance sinned cindy cat. so a risk averse investor, you, equity holder, cover my loses, say, with a credit default swap. so what that cindy cat values, the value they put on risks motivates investors and entrepreneurs and manager to say the payoffs are here or there. i'm trying to create something for the internet. i'm not trying to program
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machines. in germ they they're trying to premier manners. our programmers are working to create the next instagram they can sell to facebook for a billion dollars of stock, or three-quarters of a billion as the case may be at this point. >> host: i guess let me focus in on this a little bit. i didn't hear from you, how does the -- your marginal tax rate affect that investor, doctor, lawyer, whatever -- i get the indirect connection. how does the potential tax liable from the investment fable their -- how they then affect the behavior of managers of business? >> guest: i think it compounds slowly over time. i think to say, how does it effect tomorrow? you can get the time frame so short that it almost has no effect at all. but nevertheless it does have an effect and you see that effect compounding over time.
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so people say, -- you saw it in real estate the value of real estate is going up. i'm going to start taking real estate recollection as an investor. you're doing in effect is underwriting real estate risk as an investor and that drives builders to want to build more, and investing companies to want to build more houses and things like that. when internet vallations went up in 2000, as i said before, people are motivated -- they respond to those valuations but it's incorrect. >> host: so, where does taxes get into it? >> guest: so if we up taxes to double, we think there bee less risk taking, shift 0 from consumption -- from investment to consumption. you can capture a dollar other o value by a dollar of consumption. but -- but if you make 1.25, i
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think you'd say people are going to invest you might say well we increase the tax raid so that gets passed on to the consumer so the investor says i have to have 150 and i have to price the product at 1.75 so i'm passing the high tacks on the customer and the customer might say i'm willing to buy at 1.75. i'll stick with the old thing and that's what drove the difference between the european -- an example of this is labor redeployment costs. in the u.s., labor redeployment costs were low and we redeployed our labor from the manufacturing economy to the service economy very quickly, ultimately ended up with more employment and higher median wages. europe was in effect passed on labor redeployment. they said companies dudon't suffer the cost, this worker does so we're going charge the company for the cost. guess what.
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they didn't redelow blow labor. the defend their fact riz. we said we have 0 move from manufacturing to the next innovation, move so we transformed our economy. they were slow to transform. we see germany has a little success. but i think prospects look pretty poor because they weren't able to make the transition because of the tax on labor redeployment. i believe it has an effect on behavior. >> host: i want to come back to labor redeployment. i thought that was an interesting part of the book. going back to tax. your premise is the people are making a decision between investing -- even high income people, who -- i mean, certainly high income people consume, but you're saying that they're making big choices about investment versus consumption based on taxes.
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that it's -- i sort of imagined -- at some point you have a certain level of wealth, it seems to me, people -- kind after buy what they want ask then they invest the rest. you're saying you think actually they buy more if tax rates were higher. you think that would have an important impact over time. i take the point it takes a while. >> guest: yes. i think -- yes. i think the answer is yes. i would say it compounds gradually over time. and to the point where, what you want -- i think what's lost in this equation is, how do you really get rich as an investor? you satisfy customers. customers are what makes you rich. they say you're the guy who is satisfying my needs, not that guy over there who is not getting rich. so what do you really want talented people to be doing? you want them -- and i'd say at least five types more value is created for the customer than
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the investor. probably 20 times. i use five times in the book because i think it's defensible but i argue in the book, let's net kid ourselves it's probably 20 times more valuable. the price of google versus the productivity you get from using google. you want talented people to be driven out of their mind trying to keep up with other talented people who have taken the risk and gotten successful. what you sunny -- see in 2000 is that i had a friend that made a whole bunch of money with some crazy internet startup and i can't bear the idea i'm working, making a lot of money and there's a guy that made more money. i have to quit and take the risk to get even more. and so i think that -- i think investors in the same way are driven to take more risk and underwrite the kind of risk that produces the breakthrough. they're looking for the cure for cancer as opposed to saying i'm going to buy aa bonds or
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guaranteed debt that will pay me a modest income from that investment but i'm not taking the risk because if i succeed the government is going to take 50% or 57% away. so why should i? and if it's just a matter of that gets passed on to the customer, it just raises prices and the customer says i don't want to buy it. >> but do you think that lower tax rates have an effect on the risk profile of an investment portfolio or its consumption vs. investment? >> guest: i think it does two things. i think it motivates talented people to take more risk and allows you to accumulate equity faster and at you accumulate more he can quilt per employee or perceive the equity is going up, that people will start taking more risks across the board as consumers get richer, they'll spend more of their income and hoard less on it in our savings account which can be
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withdrawn overnight and it's difficult to underwrite business with that. as investors get richer, because they created wise investment or created google and facebook, they're far more willing to underwrite venture capital and things like that. when you come to the recession, and the asset values go down 30%, which is equivalent of increasing taxes, the big one-time shot, though, people are, i got a lot less equity, therefore i need dial down my risk taking and you get less economic activity. so if people look forward into the future and see higher tacks, they recognize that means they have less wealth and therefore should dial back their risk taking. i don't think the issue is taxes. the issue is government spending. if you spend the money you have to borrow it. people will determine how much equity they've have to underriot write the risk they want to take
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and people look forward in the future and see they have a lot less risk than they thought they had in 2007, and this is the economic outcome of it. looks like europe. >> host: first of all, talking about 50 or 70% tax rate. >> guest: no. just didn't even me. >> host: do you think that wealthier people take more risks than middle income? >> guest: you can see that in the fed -- i show some dish believe i show in the back data from the fed consumer survey which shows the assets opened by various areas in the income distribution. we all know that the rich guys have more of the assets relative to their income. it's in the range of like 5 to 5-1/2 times, and more of those assets are business assets, which create jobs as opposed to housing assets which are largely just your own consumption or
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savings, overnight checking deposits, which is very difficult to create-term investments. we can get into the financial crisis. it's difficult to put those risk averse savings to work if you don't have an i can wet investor who is willing to underwrite the risk that goes along with putting the risk averse savings to work. small business owners, large business owneres, underwriting the risks that creates jobs and creates innovation that grows income. >> host: so maybe i'm using the word risk in a less technical way. it strikes me that the actual risk, risk faced by high income individuals seems pretty small to me. i mean, any given investment might not do well. on the other hand, a portfolio is unlikely to -- it's likely to do well in recent history, given
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dish mean, i think we've seen that in the fact that the rich have gotten richer than the middle and low income people have over time. there have been good returns. whereas, something has become endem nick to being middle class is facing a lot of risk. job loss risk. so i think you're saying something different when you're talking about rewarding risk, then. >> guest: i think it's the risk that produces innovation. the risk that produces the 20-1 payoff for consumers over investors. i don't think anybody would argue there's a middle class person at risk of losing their job or having health care. if they face enormous risk? yes. is that the risk that flows other people, grows the economy, increases the income of other people, increases the satisfaction of customers? unfortunately, no, i don't think it is. i think that -- remember, we went from the 1950s when large companies were capitalizing on
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mass markets, general motors, procter and gamble, exxon to a service economy which shifted towards smaller local plumbers, doctors, lawyers, you name it, 0 to much more of an innovation based economy where innovators created large breakthroughs that have really propelled our economy. those are the risks that drive the economy forward. >> host: getting this connect back to the middle class risk and redeployment -- >> guest: i know what is i was going to say. the whole economy has grown riskier and riskier and innovation based economy is riskier than one that is exploiting the mass market, and that risk has been pushed not only to investors, which it has in part. it's also been pushed to employees. we don't have defined benefit contributions anymore.
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people have iras and things like that. they're much more prone to being laid off in a recession than they were in the past. there's much more risk underlying the entire economy and it's been pushed off to everybody and we see, gees, wouldn't it be nice to go back to the 1950s, and have a in economy that was less risky, or we could push it all off on equity investors and not have it have any impact and all the employees could enjoy a more stable working environment and do that through the government. but i think you just -- there's a certain amount of risk you're willing to take and if you take it off the workers and push it on the equity investors they'll dial down their risk taking to compensate. you'll have a general contraction or slowing of the growth raid of the economy, a sum game. >> host: i think that most people's perspective in this country is that the risk currently faced by middle class people whoa might have they're
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labor redeployed is much greater than the risk actually being felt -- faced by that high earning -- >> guest: hard to disagree but you're making a moral point as opposed to an economic point which is unfortunately i don't think that risk drives up the growth rate of the economy and creates jobs. >> host: well, in way you do. to some extent that risk is redeployment of labor risk and you think that risk that has sort of been imposed on people they might lose their jobs, you see as -- >> guest: they absorbed some of the risk. >> host: they're not doing it voluntarily. >> guest: i think in europe they tried to solve that problem by pushing it on to businesses and what they got was less employment, slower growth, lower median wages, than we have enjoyed in the united states, and i think it's going to get worse, not better, because when you look at the structure of their economy, they're 20 years, 30 years behind the transition that our economy has already
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made and they have not made that transition successfully, and i know we are suffering and we're frustrated and angry, but let's watch the movie unfold. we're going to see them suffer far more than we have. >> host: this begs a question about manufacturing. where does manufacturing fit into your vision of an economy? of a u.s. economy? >> guest: i think that in the long run you can't make for what you can buy for a dollar bought you can buy that $19 to hire a doctor, a nurse, school teacher, a waitress, truck driver. so you'll grow increasely uncompetitive if you don't take advantage of that dollar an hour labor. if labor is free, how much should you get back? all of it. it's a dollar. that's the world we do live in. so we do have to transition from jobs that can be from goods that can be manufactured overseas and floated on a bet to a local service economy, driven by innovation.
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and we have made that transition, and we have higher median wages and faster growth than europe, who has been reluctant because of the high labor redeployment costs to invest in making the necessary transition. but it's not as though the u.s. economy can outsource everything because we would have no income to buy anything. so there will always be a u.s. economy but it will become increasingly a local service economy and there's one other misunderstanding, which is prior to 2008, 85% of the lost manufacturing jobs were from domestic product games, not from juve shoring and now. % fromsol productivity game. so it's lying agriculture. food was 25% of gdp. it foal 10, that powder the growth in manufacturing and the manufacturing base powder the growth into in the service
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economy. >> host: staying on manufacturing. i think the one dollar versus $19 i'm not sure is -- that is one type of manufacturing, and in many areas u.s. workers are much more productive. so the woken reason we have rerobust, all beat declined manufacturing sector, a lot of areas where u.s. workers are way more productive so the difference in pay is offset with the product different. >> guest: we produce more and more goes with less -- >> host: the other thing you mentioned earlier, you mentioned intel. one of the reasons why i think that we've been successful in the high-tech sectors and the internet is because in fact we have both manufacturing and software and the service side of that industry here so that didn't even apple, which we think of making everything in china -- a lot of the high chip manufacturing processors are
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here, samsung, all these companies, and there's a lot been written, a lot of analysis done about actually the importance of having innovation close to the manufacturing floor simply because there's a feedback loop in all of that. so, it seems like manufacturing -- even if you're focusing on innovation economy, seems like manufacturing still has to be or should be part of the picture. >> guest: i'm more skeptical than most. i think if you go to 'chip fabrication, highly, highly cap cal intensive. it's unique in that way relative to other manufacturing. a lot of pushed off to china is plastic widget manufacturing, high run, you can put it on she shelf, very little profit. >> host: i'm making that distinction. >> guest: the capital we deployed, instead of putting it into that, we put into it google and face -- >> host: i'm not sure germany is
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making plastic widgets. >> guest: i agree itch don't think they can compete in that area, either. >> host: but they are making machine tools that they're actually shipping to china. find germany worrisome in the future. >> host: let me get back to redeprime minister -- redeployment of of labor. we accepted greater volatility in the economy. what does that mean in terms of people's lives, in terms of the somebody who is lost their job, mortgage, kids, the set of responsibilities, and their skills may not match what in this volatile economy they need. i mean, what -- you're sort of embracing the volatility of the economy. what do you offer that person? >> obviously a very tough question. because in the creative discussion process, people are going to suffer. we know this.
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unfortunately, though, i think that when you adopt the european approach, which is to say, people are suffering somebody needs to pay for that. the person who should pay for that is business. because they created the suffer. and a certain logic to it. the business says all i do is serve my customer so i have to push the cost on to my customer. and so if my customer won't pay the cost i'm going to be driven out of business. now, if you're going to do that you have to close the border don't because there's always a company that says i don't endure the costs and i'm willing to price below you, so you have to close your borders and you close offers off from lower cost labor and waste and redeploy your capitol. you say let the chinese deploy to widgets and we'll deploy to facebook and google and the effect over 20 years is we have had an increase in employment
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since then 1980s. 40 million jobs in the united states. on a base of 100 million. so 40% increase. europe and japan are less than half the level. so i do think in the end who had the net suffering? i believe that europeans have suffered far more over the last 20 years, despite the fact that many individuals in the u.s. have suffered for this -- i don't deny it -- that the people who are really suffering in europe are the children. they're eating their children for the benefit of older workers, because they get stability for the older workers but no jobs for the younger workers because companies don't go i think i'll start my company up in europe. they avoid europe and build a plant outside europe, because the cost of retee employing workers in europe is high relative the rest of the world. so you can do it. i think the net-net cost is higher, not lower, even though they're certainly suffering that goes along with it. >> host: i don't want to debate
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numbers. i think japan is different. it's -- they don't accept immigrants essentially. they have declining population, so comparing job growth numbers in the united states and japan -- and i also think that -- i do think the european situation and looking at germany, there are different ways to measure economic success without getting into well-being and those things. >> guest: look at 25-year-old. that's the eastess way. do you want to be 25 in germany, france, or the u.s.? >> host: i don't speak german. i'm not 25 people talk to me in german because of my name, michael enlinger. what should spun making over -- what percentage of income should we be asking of them in federal income tax. >> guest: i don't know the
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answer. we're taxings at 16%. we're spending at 24. we need a 50% across the board increase at every tax level. we can pretend that upping from wherever it is now, 35 to 39, is going to put everything back in order but it's not. we need much bigger increases than that, and i think we should stop pretending wore going to get an economic rebound. it's been four years the argument i try to make in the book it what is more valuable the middle class, dollar increase on a rich person who is make $10 million a year, probably saving more than 40% of their income but i use 40% in the book because that's a guy at a couple hundred dreads thousand dollar. what he rather have the hey value from investment? he would rather have investment. >> host: we have four minutes left. i want to -- i want a quick
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response to this, i'm just going to point out that the point in time where you note the deviation is actually where bill clinton raised taxes and if you look over time you'll see that marginal tax rates -- we have had higher growth rates and higher marginal taxes in this country than not. so give me a brief response to that observation. >> guest: bi clinton, the nasdaq went from 800 to 8,400. so the increase in payout for the successful risk taking and the amount of i can wet people happen overwhelmed any tax increase. so one is prerogative, one is negative. 1950s when you have high marginal tax rates, you have 20 years, two decades of underinvestment front world war ii and the great depression. the g.i. bill putting everybody through college and the whole mass market together with television and. >> host: other things mattered more. >> guest: a lot more.
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>> host: next -- oops. the wrong one. i want to read you one sentence from -- two sentences from your book and ask you quickly what you meant by them. when always is said and done you're either for investment and risk taking as the solution for the economy or your against it. the real world offers no middle ground. >> guest: republicans versus democrats. i think the argument is, do you put your faith in private enterprise as the person who is going investment capital in the middle class or believe the government can invest that tax and invest that money more successfully on behalf of the middle class and there's no guy in the middle who is -- if you need the next sentence, it says you have to make a compromise with the religious right if you're on the investment camp in order to get a majority. referring to there's no middle ground. >> host: i would respectfully say the way you articulate the
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antiinvestment position is a bit of a caricature. i want to read -- i think maybe my favorite quote from the book. actually starts out as a quit from a stanford economist, douglas person home, and i'll -- senator economist concludes, as an economist, one cannot rerue very volumous literature on taxation and saving without being somewhat humble bed the enormous difficulty of learning anything useful about the most basic impair cal questions than you, say, unfortunately the same is largely true of all of economics. you must use empire tall evidence to evaluate the beliefs that divide economics and decide for ourselves which set of beliefs seems most plausible. so i want to say thank you because i think you have done an effort to do that in this book and you have your point of views on it and others will, but i think the enterprise you
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described in that passage in the book is really sort of what we're kind of all trying to do. >> guest: i agree. >> host: thank you. >> guest: thank you for having me. ...


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