Transcripts For CSPAN2 After Words 20161113

In 1970s but historically very high levels of inequality. Do you agree with that . We can get into measuring nontaxable incomes or health care or pensions and Social Security which have a big impact, a bigger impact than people realized, smaller families, twocareer families and things like that. Lots of households that arent working whether they retired or other reasons, but those things do affect it. Do i think we pass through an era where innovation has been strong like it was back when we were inventing electricity and cars and industrializing the economy and i think some fortunes have been made as a result and perhaps we are not at that level but the nature of the investments have changed because you went from a capital intensive economy that required a lot of investors and savings so they had to share to an Economy Today where it says innovationeconomic and we can go on a long list. And so they can scale without really having to share their value of their innovation. Thats allowed them to get quite wealthy. We have moved to the facts and explanation of it. A lot of the book is on that. You talked about the reasons of rise of inequality and also the reasons for slow wage growth. Lets talk about that. Its been a tough time for a lot of workers. I tell the stories and leads directly to the heart of the controversy of the book, i was a manufacturing engineer of ford motor company. I grew up in the midwest and we moved plants to mexico, for example, dont worry, entrepreneurs are coming, capital sitting on the sidelines, Interest Rates are zero, raise productivity back to where it is and youll be back to where you were before but i think the workers look and they say, entrepreneurs have moved to california and outsourced to china and engineers that remain behind are designing products more mexican and offshore workers and im waiting for entrepreneurs to put me back to work and so 40 million born adults, thats a lot of people looking for innovation and super vision and entrepreneurialism to put them back to work and without that, if you dilute resources, slow growth relative to the west of the economy. We are facing high inequality, slow wage growth, it seems like its a natural thick to do is use the tax code to redistribute. Thats not what you want to do. Well, i certainly recognize that as a possibility and maybe useful in some places. If youre a 50yearold worker who spent your whole life working in one endeavor and trained in that endeavor and you lose your job itll be awfully hard to get a job so theres cost and we need to be thoughtful about that. And that talent is working inside of institutions like google, like Silicon Valley which greatly amplify their productivity. Those institutions were built very slowly over time through successful risk taking. It puts equity into the pockets of risk takers like i elon musk who is familiar with the technology in a way thats difficult for people on the outside to make investments successful amplify, magnify the productivity of american the most talented american workers. What you see is our employment growth has been twice as fast as france and germany. If you look at unicorn, billion dollar ipos, over the last year we have created 250 of value. Europe created 25 billion of value. Its a tip of the iceberg but some indication, the amount of innovation that our economy is producing relative to theirs and if they werent sharing disproportionately their growth would be slower still. You look at test scores, for example. 50 of japan. We are doing it with a small group of people who are better trained, more highly motivated and having productivity amplified in the ways that the rest of the world havent achieved. Those countries were going faster and catching up and we pulled away from them quite dramatically. Whats the evidence that the tax code would slow that down if we enacted more progressive policies, raised marginal tax rates, raised the estate tax rate, do you think steve jobs wouldnt created the iphone, do you think bill gates wouldnt have created microsoft and why . If you look at an individual base, bill gates did not expect to be a multimillionaire when he was outwriting system. They didnt need that money to note vait to do it. When you focus on a individual, you lose the bigger picture. This person might discover it instead of that person, but if you didnt have Silicon Valley and all the people working and the training that went into getting there, the risktaking, i dont think you would have had bubbling effect that we have seen and you do see, for example, that since bill gates theres an enormous increase in the amount of entrepreneurial risk taking thats occurred in the United States as workers have chased after those those gains and id say, where do we see talented people taking large pools of talented people taking risks. Surprise, surprise, we see it in Silicon Valley where the payoffs are much higher, do i think the difference of tax rate in california and kansas, thats small in comparison to all the other things which are amplifying the payoff for risk taking, but on the other hand, if im sitting in a coffee in greece trying to come up with the next idea, what chance do i have . If im working at google and im seeing all the ideas around me and i have a good idea and a network of friends who can do the marketing, do the engineering, do the programming, do the finance, of course, im going to be more prone to take that risk because i have a much higher probability of succeeding and i have a much better idea to begin with so im naturally going to be more incline and seems common sense to me. If we cut europes tax rate, it doesnt have the institutional capabilities to grow fast in this economy. If youre saying not higher tax rates are driving things and why not . I think both synergies were created and bubbled from a much larger pool of risktaking. We can tax and distribute more in the short run but we slow down the growth and in the long run look at the difference between the growth wait of the United States and europe, look at the difference between the income levels of the United States and japan. They get bigger and bigger and the difference is bigger and bigger and the ability for those countries to catch up now that they have fallen behind its unlikely that they can catch up unless we have a major shift in technology or biology and the internet and we have a big advantage that maybe we cant sustain forever but we certainly have a competitive advantage today. In the book you go through five different miss an let you explain why they are miss, one is incentives dont matter, no economist believes, but you really push them a lot. But to believe not just they matter some but a lot i agree with you on the way, but the skeptic here didnt, bill gates did what he wanted to do and he would have done it anyway so why not tax him a lot. How would you convince i only look at the difference between the u. S. And france and germany. I dont think we are going to get to definitive evidence that doesnt exist. Whats the elasticity of raising taxes over the long run. Everybody with all economist and theres enough data that defines clearly and ultimately decide for yourself what you believe and i look at the difference what happened between europe and the early 1990s and its a shocking difference, i believe. If you look at north korea and south korea, if you look at russia versus europe and venn wella versus south america. You look at twai wean versus hong kong. New china versus old china. For sure. Absolutely. Over time the differences compound to create ipstitutional capabilities that have huge magnifying effects. Thats why i think its a mistake to just look at bill gates and say what would happen to bill gates. Its not really relevant. What would happen if Silicon Valley if we would have raised the taxes significantly and slowed the gradual accumulation of risktaking and success and the creation of institutional capabilities. How about 1950s . Bit networks of highways and enormous mass markets. We had people rurping back from the war when you had a decade or two decades from the Great Depression where really no innovation had been implemented so, you know, we have fallen behind the natural great of growth if you will. There was a huge migration out of agriculture into manufacturing. Those things lined up in the way that magnified the gains. Despite the fact that were 90 at the top. Nobody paid 90 . Corporate taxes were lower than you know, i argue in the book that economics is very circumstantial even though we try to have the truths. I think if you go back to 1950s because the economy is capital intensive, whats our large corporation, proctors, low Corporate Tax rate at the time, not individual entrepreneurs. More restaurants and thats just competing with each other and not driving growth. We happen to be fortunately intensive area at times when risk taking and talent are driving more and its become much more entrepreneurial and large corporations have a difficult time innovating and such a lrnlg pool, too afraid to just try to do it all. We are trying to stop global warming. We need huge corporations and the whole thing can change to dynamic than the one we are living here today. It happens to be that today its entrepreneurs out without capital that seem to be driving the growth. Lets go back to second myth. Largely unearned. Why is that a myth . The argument that the 1 has gained success by negotiating with the cronies, that theres been a huge rise crony capitalism. You see telltale signs of crony capitalism. We see it in sports. Its surprised how much cheating on a misdemeanor level. There are certainly going to be a lot of cronyism, the question is whether its riding enough to account for what we see in rising income inequality. We should have seen a slowdown in growth relative to other highways economy and acceleration in growth not as much as. But in the acceleration relative to the other one. Its hard if youre running in a marathon and you hit the hill, everybody is going to slow down. Question is how are you doing relative than everybody else, a better gainl of whats happening. One thing you have seen is acceleration and other is turn over in status quo. If you look at cutting edge in technology, 15 largest techs in 2000, the only one held to market value is microsoft, the rest of them are down to 40 of the value they were in 2000, a whole new set of competitors at the level. You look at the forbes 400, its like 75 to 80 of them are selfmade workers, business owners, if you look at the difference between ceo pay and worker pay, you know, how much ceo pay risen relative to worker pay is largely driven by not not by a change in ceo pay, relative to worker pay but companies that pay all workers at all levels higher so thats an indication that its a creation of new businesses that are more valuable, if you look at the dispersion of returns in manufacturing where the where the profitability is shifting towards technology, you see less dispersion among returns which indicates competitiveness and here in innovation you see why diversion which shows you disruption of the status quo. Where is the evidence on the other side other than rising income inequality. The one place is riseing profitability. What about where a lot of the big money is being made in the finance industry . We didnt have occupied Silicon Valley or occupied hollywood, we had occupied wall street. Yeah. Who would you justify the big bucks being earned by hedgefund managers. I will go less on hedgefund managers because its complicated. Lets talk about finance in general because the 80 20 of it is, we will probably get to this later, the trade deficit floods the economy with risk of saving, we have very little use of savings in this economy. The savings would get unused. Somebody had to innovate how we are going to put that money to work and fall to unemployment. Nobody was working on that problem except for wall street and i dont want to be a big defender and they did a couple of things, they figured out how to securetized mortgages and Different Levels of risk, they created syndication where they could tell pools to entire world, they found a logical risktaker which in hindsight turns out not to be gad but put the money to work and said, i dont know, if youve noticed but your house has risenning value and you could spend that money and youre never going to get that money again, you basically won the lottery and we can do that, we can facilitate that with a no money down, no risk to you because you could safe the money. Everybody is rushing to get out of the banks. My point is only they did come up with innovation which in 240067 we thought it was a good idea and paid them a lot of money for innovation and a lot today, that innovation wasnt so great and we are not going to pay for you that anymore and their volumes are way down and theyre earning a lot less as a result. For hedge funds maybe theyre all trading with inside information. Bain capital we would fire people at any hint of inside information. Just people had information that we thought even was close to i think we had unique insights about what makes businesses successful. And we employ those not only in our leverage but our public investing business and we have made better returns than average as a result. And i think one of those insights is that if you have a lot of market share, youre going get a higher return on investment and the value of the future Investment Opportunities is more valuable than the market recognizes. And what you want to do is get those companies and invest a lot more money in opportunities because the managers are all underinvesting and you can pick that up and capture that value and that will have a big impact on the value of the company and we use that publicly and privately to great benefit. Do i think other guys have inside trading, sure, but i think its small and not large and hard to account for everything that we have seen on inside trade. Third myth in your book, Investment Opportunities in short supply. Stagnation argument. I would say i look and i say, Silicon Valley is on fire, if you you dont need a lot of capital because theres a difference of do we need risk averse savings of the kind that comes as a result of the trade deficit. I dont think that economy has much need for it. I dont look at that and say theres shortage of Investment Opportunity but shortage of Investment Opportunities that needs that kind of savings, theres a different. Not only is there shortage of Investment Opportunities that need that saving but surplus because of trade deficits and germany drives the Interest Rate down to zero, but theres a whole set of phenomena there. I would only say if you look at Silicon Valley is on fire. When i talk to ceos theyre scared to death of getting disruption and talent they need to fight all the disruption and find alternative investments that will keep businesses profitable in the long run and the third thing if you look at i think tangible investment hiring smart people to think about the engineering future, you see nothing but rise right through the recession, you know slowing down but through the recession, you dont see evidence of a big falloff in investment. Productivity growth will start . I think it can get complicated for a lot of reasons but one of the reasons is i do think that today you have its like a lottery. You will either scale up and get rich without very little need of investors or youre going fail. Its the only way they are going to get rich. We are now putting a lot of talent in risky bets, its very possible. Say it in the book that we may be overinvesting there and as a result theres a whole source of productivity gains when is super vision but to the extent the talented people arent super supervising and overplayed the lottery and investments wont turn out so great, but to the extent they are not doing this, that lowskilled immigration, super vise all of this too unless its contributing proportionately to the constrained resource which i say is talent and risktaking, what you ought to see a slow down in productivity. Youre willingness to take risk and profitly trained talent. Slow down in productivity because people are fearful and i think when you change all the regulations that were changed in banking and health care, when people were taking risks in banking like there were no tomorrow. Today they would be scared to death to take the risk. That may be a good thick or a bad thing but certainly slow down innovation and productivity when you add on regulations because people take a fee and im not going to jail. Theyre not doing that today. Okay, your fourth myth, progress hallows out the middle class. The middle class is struggling according to middle people. I heard and i showed you in the book what is the Income Distribution for fulltime white workers, black workers and hispanic workers, what you see theres no real change in distribution except way out in the end of the tail of. 1 and upward shift in the median as people have risen. 11 point out of the middle class because they are using absolute numbers, distribution as it shifts below. But 7 of those 11 points came from income moving up, four of those points came from income moving down. You look at the 4 points, three of those points came from influx of lowskilled hispanic immigrants. What happened to everybody else . 7 points up and 7 points down. Not such a bad tradeoff when seven of the eight points are upward movement. Myth number five, mobility has declined. I think why is that wrong . If you look at mobility in the u. S. , first we know that study which looked pretty comprehensively i think sort of the landmark study of this at this point in time shows in decline in mobility for the United States. Ting most interesting thing i find in the book if you look at comparisons which allegedly has the best mobility and equally distributed income its virtually identical for the u. S. Except for bottom 20 , if you peel the onion, blacks look different from escandinavia and if you look at African American mobility, you find in mobility across all races an demographics, single motherhood is a killer on mobility. High School Dropouts is a killer on mobility. U. S. Population which a portion is African American they track identically to single motherhood, the effects of single motherhood and high School Dropouts. If you look at the other income levels, they the mobilities look similar to the rest of society. Okay. Theres noneconomic reason why we might see mobility slowing down at that rate. Okay, i want to move from the facts as you see them to what policy might do about the situation we face. One of the books that influence my thinking of income inequality race between education and technology. Technology tends to increase inequality and education tends to the other side of the lenler and so their conclusion that we need to push forward on educational and try to increase years of schooling for a typical american and the main thing to rise inequality. Why is that . Yes, one thing i would say about the book, a great book, by the way, influenced my thinking too. It doesnt segregate the 14 from the. 1 and when you do that you see the growth is in the. 1 successful, risktakers at the highest life. You look at the effects of education more broadly eliminating that, it isnt quite as dramatic as the book makes it out to be. Thats where most of the inequality that we have seen have come from. Eventually they can slice that. What i look at in the book is could we find off the Shelf Technology that would make education more successful. People say the test scores are higher in europe, for example. I look at all comparisons. If you look at white americans versus europeans, for example, they score virtually identical. If you look at first generation immigrants the u. S. Scores better. You look at low social economic families, the u. S. Scores the same or better than than europe. So you go, there really is an evidence that europe has secret sauce that we failed to implement. The other place people look at meachcion, people score highly from the first time they are tested and they dont improve relative to the rest of the country over the course. You would expect exactly the opposite which is exactly the same in the beginning and 142 years of psychological psychologicals. If you look at Charter Schools, one area that tutoring intensive, no excuses Charter Schools do appear to work independent of what selection bias, which is obviously the parents that want that for the children are going the fight to get their children and get passed to lottery. Student pop stwhraicion overrepresented by conscientious parents that work hard to get. But josh and people have worked hard to sort that out. It still appears that tutoring Charter Schools demands for that. If you look at the work, it suggests if you can fire bottom 5 of incompetent teachers, not that we are trying to blame teachers for success or failure for american schools, most of them are hardworking people trying to do the best job they can but we arent able to fire the bottom 5 , one of the things i call is a constitutional amendment banning teach e tenure. All we need to do is spend more money and implement that and somehow our Education System is going to get a lot better. On the high end, theres lots of things we can be doing. Theres lots of students who are not studying subjects that really employ that are going to employee fellow man. Theres a surplus of talent but properly talent that takes europeial risk that takes less fortunate fellow man into jobs that are more productive and higher paying that theyre interested in doing other things in solving that problem. That problem is satisfying relative to competitors. Theres a painful job that yes, it pays highly but also gets you out of bed at 6 00 a. M. In the morning because youve taken on responsibilities and those responsibilities lay on your shoulders which is not to say that that the working man isnt working hard to put food on the table and to make ends meet, you find a lot of talented people that really havent accepted the moral responsibility. If you look at talented students, they dont graduate from college as successfully as the rich kids do. There maybe reasons for that. Maybe theres reasons we cant solve. I think we can be a lot more thoughtful about how to get the kids in the best possible schools and improve schools because they are far more likely to feel moral obligation to help community than a lot of other kids. Im skeptical that we are going to have dramatic change in a reasonable time period and we are pumping into some big problems like a lot of retiring baby boomers and we need fast growth to solve that problem. Some economists most noteically jim argued for preschool specially for underprivileged kids. President obama has argued for that as well. You say youre skeptical of that. I looked at all the research. I think you dont see very many examples where its truly been successful and its not so simple that we just get the kid to preschool and do whatever we want and somehow thats going to have a dramatic effect. What you find in studies they do show affects but the effects fall off in fourth, it does have an affect on civic responsibility. I worry about the hawthorne effect. Youre far more likely to feel special but if i do to everybody, you may not feel so sprr anymore. I said, we should continue to run a lot of excerpts in preschool because we all believe that the brain is highly placid the younger you are. We dont really know much about it yet other than to know that theres probably a real opportunity. I dont think we know how to take advantage of that opportunity. I dont think the large scale excerpts have not proven successful. The literature is mixed. Theres no definitive evidence on the impact of taxes, some growth. Some believe that lowering tax rates are good. I would say that the evidence on taxes is more ambiguous because no one can really hold exactly. I think theres very few really definitive successes in the day care area. Theres a lot of propaganda in academics and literature. You have to sort that out and get to the guy that is are really, really rolling up their sleeves. Guest one is our willingness and capacity to take risk, is the other is properly trained talent. I may be willing to take the risk if i have the supervision and talent to implement it, but i dont, so i dont take the risk. I think its very difficult to accumulate equity thats willing to take risk versus people putting their money in the bank and saying ill fund an investment as long as youre willing to underwrite the risk. Equity is precious, were lucky to get it. It comes from a kind of lotterylike process, competitive advantages, i mean, competition can water it back down to zero. So when it arrives, we should treat it with the preciousness that it deserves as opposed to taking it for granted. I think its a bad proposal to tax it, redistrict it and consume it when were lucky enough to get it in the first place. I think theres the, its a lot of odd, i think everybody serious would agree odd economics in the book where somehow we generate high returns on investment despite the fact that nobody needs the investment anymore because were not growing, and we dont have really any need for the investment. I dont think i think even paul krugman, brad delong, Larry Summers have been critical that there really is no underpinning. I think Larry Summers called it a misreading of the literature, and if you look at the evidence that he puts forward about the 1 , i think he misstates the evidence in the book and most of the evidence points to the fact that 70 of the wealth of the top. 1 has come from selfmade business founders, not from Public Company ceos negotiating with their cronies. I think another thing you look at is kaplan studies from the university of chicago that show that a raise in Public Company ceo pay hasnt outstripped private company ceo pay where the people on the boards own the business. So youre not negotiating with your cronies, the two growth rates have been very, very similar which is an indication that Public Company boards are not increasingly doing their job less and less effectively. If anything, we see faster turnover in ceo pay. I mean, ceo tenures have gotten shorter over time. Host okay. So youre skeptical about education, youre skeptical about a wealth tax, a la piketty. What would you do . [laughter] guest one of the things i say is the status quo exists for a reason, so, you know, trying to disrupt it host well, thats another question i had. Is this the best of both possible worlds . [laughter] guest well, we are in a much better world than i think were willing to admit. If we stay at this level, yeah, weve got problems to solve, but were still better host so the hat should read make america grateful again. [laughter] guest maybe it should. I like that, thats good. One of the things i say is properly trained talent is a binding constraint, and we can do more. The top 5 , five million workers, theres 77 billion people in the world, half of those we tonight know who they are, half are too young, too old, half are never going to move, you get down to a pool of about 50 million workers in the top 5 who would potentially move to the United States. People should fear our immigration strategy at that level, because we should be trying to capture their talent, bring it over here and fuse it together, put it into our institutions which magnify their productivity and the success of their risk taking way more than the institutions in their Home Companies countries. But, you know, if thats really whats driving growth, then we could double it by bringing in another five million. I dont know if theres synergistic effects that gives you more than one plus one. But that, i think, is our best shot for growth. Host by the way, i think a lot of economists would agree with that. No economist that i know of argues against talented immigration. Guest yes. Another proposal i make in the book, i think this one unlikely to be implemented, but if you really look at the tax numbers, the middle class pays in taxes about what they get back in government services. In the year that they pay. So theyre not contributing anything to their retirement really, and theyre not helping the old people today, theyre not helping the poor today, thats all being done by the top 20 when you really look. But i say, good, so why dont we do the following zero the middle class tax rate and charge them the full costs of host how does that work . I use the roads, i use national defense. How do you charge me for that . Guest well, some of thats local, im really talking about federal. Guest well, national defense, say. Guest what i do in my calculation is say proportionately the amount of income host its an income tax. Guest it is because you cant im giving it more as a con sell check up conceptual thing. You can give vouchers, lots of stuff that you can do, but its complicated. But ultimately, i think, if you did have a person say im not paying any taxes, but if i want to buy government services, i think two things would be happening. Why do they cost so much . I could get it over here in the private sector for half the price, and im not so eager to have services that i have to pay for as opposed to free services. So it would put downward pressure on Government Spending. If the government spends the money, they consume those resources. If the private sector spends, i think the private sectors a more effective way to spend resources, and it would shift to the private sector. Host now, why dont we talk about another one of your ideas which is trade and the trade deficit. This is where i think youre probably in disagreement with most economists. So why dont you explain your view of why we should be so worried about the trade deficit. Guest well, i believe that it floods the United States ultimately, you have germany, china, previously japan, mexico probably for corporate savings but slightly different, but lets just look at germany. They have enormous savings level in china. We guy goods for them, they end up with dollars. They loan us back the money. And the moneys very risk averse. They buy tbills. That pushes our risk averse saves in the banking sl. Banking system. I said theres not great Investment Opportunities for risk averse savings. It doesnt come back as equity, and its not as though just because it bought tbills, the guys who are risk averse dont just start taking risks because somebody bought their tbills. They say, bank, you find an equity person to put up collateral, and im willing to fund the investment, but im not willing to take risks, and im perfectly happy to stuff my mattress with corn rather than put it into the system. So the money sits there unused. I look at trade, and i see were 13 exports, 16. 5 imports. If we say the first dollar of trade, creating a lot of value from that. Last dollar of trade ought to be break even. I dont know where, but if its occurred when you get 1316. 5, the way to break even, youre probably awfully, awfully close to break even. But what happens at that level when we cross that point is we start giving up jobs unless we take the risk of putting risk averse savings to work. But my argument is that we are capacity constrained by our willingness to take risk, and the evidence is that that the Interest Rate zero and the savings are sitting in the bank unused. Host okay. Lets imagine china wasnt buying tbillses, suppose they were buying u. S. Equities. Would you have a different view of the trade deficit . Guest potentially, yes. Its not just buying public equities. They really have to roll up their sleeves host well, that supports the venture guys who are eventually going to go public. Guest i agree. Although theres a big equity premium between the riskfree rate today and stock market rate even though the pe ratios are high. The margins are at recession levels, one over the pe ratio minus the taxable rate of getting to recess levels, and the liquidity premiums are high as well. Liquidity meaning if i put it in the stock market, i could get it out tomorrow. If i actually build a factory, i wont get it back for 50 years. You have to get people to both take the equity and thely quiddity risks. Liquidity risks. It would be a lot better than the tbills because then our riskaverse savers when you think about ricardo caballero, probably off on a taj gent here tangent here, we would have safe assets for the people to buy instead of selling it to the chinese, and these people putting it in the banks and it sits unused. Larry summers tried to solve the very same problem with his idea for infrastructure. And we would all agree that infrastructure spendings probably better than just redistribution in terms of future growth. But what he doesnt tell you in his proposal is unless it increases Government Spending, then its not borrowing the money thats sitting on the sidelines and putting it to youth. It both has to invest in infrastructure and increase Government Spending. Government spendings at 36 of gdp, projected to grow nine points over the next 30 years as baby boomers retire. Thats up to 45 . The debt is at 75 of gdp up from 35, its projected to go to 140, and those projections are low because they assume were going to drive the Discretionary Spending to zero which were not going to do. So the imbalance is even greater. Do i think that spending more money through the government rather than the private sector is going to help us more in the long run . Its just hard to believe. But if someone said would you rather spend a dollar on infrastructure than some Entitlement Program for rich guys like me, id go, yeah, id rather spend it on infrastructure. Do i want to increase Government Spending . No. Because my argument, again, is whether the government spends it or the private sector spends it, either way it consumes the constraining resources, prop everily trained properly trained talent and our willing to take risk. Thats the real crowding out. Its not a crowding out of savings which is the traditional way that economists think about it. Theres no crowding out of savings. The Interest Rates zero, the savings are sitting unused. Host lets talk about your background a little bit. [laughter] early in your life you were at bain capital. Guest yes. Host tell us what bain capital is and how that experience influenced your view of how the economy works. Guest so ill go back two steps further which was i was an engineer who spent a lot of time in quantitative economics, if you will, and then i spent a lot of time on the shop floor, and then i worked at Bain Consulting, consulting to a lot of Large Businesses before i went to bain capital. But i think bain capital had an insight which i described earlier which was if you truly had a competitive advantage, the easiest one to buy is youre the largest competitor in your space. It opens up future Investment Opportunities which are more valuable than it would be if youre earning close to the cost of capital, if youre, you know, really in the thick of competition and barely eke out more than what it costs to borrow money. And those opportunities are undervalued by the market even including lbo investors, and theyre underinvested in. And if you buy them and invest in them, that can create enormous amount of value. Now, what held us back from just going to infellowshipty . Thement infinity . The amount of talent we could hire. Wed hire guys, train them, teach them, first thing theyd do, go to the competitor, be paid more money. [laughter] so the cost of training these really talented guys have very, very expensive because we get very few of them out of the back end of the process. We cant its hard to get them to stay and continue to create value on our behalf. They go i can create that value on my own behalf. So i started to bump into the very things and the other thing i saw, learned was dealing with ceos you have to pay ceos a lot of money to take the risk. They take a lot less risk than you want them to take as an investor because they go disrupting the status quo is a very risky thing to do. The organization turns against me, and i have a hard time surviving. What i want to do is be the ceo, the grand poobah, for as long as i can possibly be, and the way to do that is minimize risks to my career as opposed to what an investor wants me to do which is take a lot more risk in trying to improve the future, make those investments that might fail. Those are all things that put their career in jeopardy, and if you pay them enough money, they will take those risks. But people, i believe what we found is they underpay the Management Team, and then the Management Team is sort of satisfactory underperformance which theyve been living in for a long time. Theyre actually the market leader, theyve got a huge stream of Investment Opportunities, and theyre underinvesting in them. That doesnt work, that doesnt make sense. Host i want to ask you about one arcane tax issue, carried interest. Im guessing at bain capital you benefited from carried interest. Guest yeah. Host can you, for the listener, define what carried interest is, what that means, and tell us your view of whether it really is a loophole as a lot of people have suggested and whether it should be fixed. Guest so i dont think its a loophole, is the answer. But people can disagree. Carried interest is simply were investing 100, and some investors putting it up, and then you come to us, the general partner, and say well give you 5 or 20 or whatever the case may be, and thats your compensation for having managed the investments host its competition for your time. Guest competition for your time. Host so why is it not taxed like other compensation . Guest because youre only going to earn it bear with me for a second if the investment increases in value. So youre not getting 5 of the 100, youre getting 5 of everything above the 100. So you very often, and the average is going to be close to zero for many, many investments because you havent really created much value, and theres a hurl rate on how much you have to earn. But i think the tax as an investor to get the carried interest, tax laws very simple. It says somebodys going to pay this tax. I dont care who pays it, okay . So if it was an investor who would have captured the capital gain and they would have paid the 20 and bear with me for a second then if they give 5 to you, youre going to pay the 20 on that 5 . The reason why in corporations where corporate managers dont get the Capital Gains treatment on their options is because of double taxation. The Company Takes an ordinary income deduction. Hay say thats they say thats fine, but if youre taking an ordinary income deduction, this is the irs, somebody else is going to pay the 50 tax, 35 federal tax that that deduction reduced my tax revenue by. So they simply look through it all and say what would my tax revenue have been, and im going to collect it. In the case of it was really a capital gain. So what we could do is say and we do this all the time which is to sell to our ira, to sell to our family trust, whatever, we have to get a valuation of what we think the options are worth with. They do the black shoals model, traditional way to calculate the value, and then they say, okay, thats really the value that they got. Now, what the irs host this may be getting too much in the weeds. Guest it could be, but they should say ordinary income on that piece. But thats a nickel. Almost all the must be that you see in my bank account came from the value that was created, the Capital Gains created not only for me, but for investors. Host i think for a lot of people it looks like youre being compensated for your time and paying a lower tax rate than the ordinary worker guest right, yes. Host and that just seems fundamentally unfair. Guest i think theres a piece of it which is that, and i agree with you. Thats the value of the option. Im going to give you an option on ibm stock, you immediately look up the value in the wall street journal, you say, thank you, thats what i got paid. We get charged Capital Gains instead of ordinary host so thatd be some reform. Guest thats a nickel. What you really see is those options, we were very clever about which ones we bought, which ones we invested in, and we were able to make those options worth a lot of money, and theyre treated as Capital Gains. We can make an argument, and i do in the book, that we should lower the Corporate Tax and raise the Capital Gains rate because part of the reason why the Capital Gains rate is low is because of the double taxation of Corporate Taxes which maybe doesnt apply in, well, does apply because were corporations, and the profits are getting taxed. Host were having this discussion one month before the president ial election. [laughter] so, obviously, theres a lot of politics in the air, and and were here in washington, d. C. , an especially political place. When you look around at the politicians east rubbing either running for National Office or local offices or state or senate offices, are there certain politicians that are saying the right things and certain ones that are saying particularly the wrong things . Guest well, lets go to [laughter] the two president ial candidates. Host okay. Guest from my perspective, i would have a very difficult, never be able to vote for Hillary Clinton because i believe increasing spending 200 billion a year over the next ten years at a time when theres no end in sight to the increases were going to see from retiring baby boomers, that seems like a prescription for very low growth to me, and the marginal tax rate, getting it up to 50 , you know, i dont think thats wise economic policy. I think in the case of donald trump wed all kind of scratch our head on behavior thats hard to understand and try to weigh that against, you know, do you want to take that risk versus what i view as slower growth. You know, i think youre getting outside of the realm of economics. So hard for me to make that call publicly. I can make that call privately. I dont know how to use economics to make that call host what do you think of Donald Trumps discussion of renegotiating trade agreements . Guest i think its a real mistake to tax trade. I think trade deficits are a problem. You cannot make for 20 what you can buy for 2 and be competitive. I think on Donald Trumps fiscal policy, its basically guns, were going to grow the military, butter, were going to grow the entitlements, and tax cuts, you know, with debt at 75 of gdp host arithmetic guest right. I cant support that. Host okay. To now, i read your book over the summer, and i read right next to it a book by bob frank called success and luck. Guest yes. Host and i came away thinking that one big difference in the big world view between you and bob frank is that you view the world as fairly meritocratic, and he views outcomes as largely based on luck. Guest me too. Host based on luck . Guest yeah, sure. Host but when you say that success is largely earned guest well, i would have said this, i think 99 of my luck was behind me the day i was born, and then i just got lucky from there. Its true that i went to engineering school, i studied math, i went to business school, i was a Student Council president , i thought a lot about leadership, i went off to Bain Consulting and learned a lot about business, so i did train myself and such, and i did take risks along the way. I went, oh, im not going to get rich at ford motor company, im not going to get rich at Bain Consulting. I went to wall street, and that wasnt my thing either. Mitt hired me, i told him id work for free. So did i take some risks . Sure. Did i get incredibly lucky . Of course. It doesnt really matter at the individual level, theres just a pool of people who are trying to get lucky. Somebody in theres going to get lucky. What you need is the pool of people who are trying to get lucky many of whom arent even trying, but if you dont have that pool which europe doesnt have, japan doesnt have, you dont get the institution, growth in the institutional capabilities which ultimately drive growth in the economy. Whats happening at the individual level, it doesnt really it will host unlucky, if you were lucky, what should we do for the unlucky . Guest you need 99 unlucky people to get 1 lucky person. I dont think we can reward the unlucky, because i think where that will lead is a whole bunch of art history majors who arent trying to get lucky and say im going to get rewarded anyway. You have to go, no, youre a harvard student, youve got enormousal let. You have a moral obligation to put that talented to work. You can do it through philanthropy, but another way is through satisfying the demands of customers. And they call them demands for a reason. You know . [laughter] because the customers are demanding, and its hard to satisfy them, and its painful to satisfy them. And so you want people to get the training, to be motivated, to take the risk and, ultimately, theyre going to fail. But we cant how are we going to go back and adjudicate, oh, you really had a good idea, but im sorry it didnt work. Oh, over here, mark zuckerberg, you had the same idea and, yeah, maybe you had a better team to implement it because somehow you had the capability to pull that team together. Maybe it was just random. Were going to split it all up and divide it between the two of you, i just dont think it can its nice in theory, but it cant possibly work in practice in the way it has worked for the United States. Host yeah. I can certainly understand that. Well, let me say that i feel like i have been very lucky to have had this opportunity to talk to you for the past hour. [laughter] thank you very much. And congratulations on what is a really terrific book. I dont agree with all of it, but i found absolutely all of it provocative and worth reading. Thank you so much. Guest thank you. Cspan, where history unfolds daily. In 1979, cspan was created as a Public Service by americas Cable Television companies and is brought to you today by your cable or satellite provider. Heres a look at some books that are being published this week. Vermont senator Bernie Sanders shares his experiences from the democratic primary and weighs in on current political and social issues in our revolution. Fox news anchor megyn kelly recalls her personal life and professional career in her memoir, settle for more. Daily show host trevor what remembers his childhood in apartheid era south aftera ca in born a crime. In wonderland, Steven Johnson argues that innovations come from great minds entertaining themselves. Another book being published this week is they cant kill us all in which the washington posts Wesley Lowery reports on race and Police Anything america. In and joan, lisa napoli explores the life of ray croc and his wife joan as they made and gave away their fortune. Dave grossman analyzes how violent video games pose psychological dangers in assassination generation. The granddaughter of Abraham Zapruder explains how her grandfathers footage of the kennedy assassination impacted a nation in 26 seconds. And Brown University Professor John Edgar Wideman looks at the life and death of louis till, father of emmett till, in writing to save a life. Look for these titles in bookstores this coming week and watch for many of the authors in the near future on booktv on cspan2. Host Hillsdale College president larry arn, what was your goal with your book, churchills trial Winston Churchill and the salvationfree government, what are we going to learn . Guest ing by my goal in the book was to state that, and so thats what i set out to do. Host what did you learn . Guest oh, a lot. The book was much harder to write than i thought it would be. By the time i started the book, id been studying churchill for about 40 years. It takes that long, i think. He wrote so very much. And i made the authors terrible mistake of being, thinking it would be relatively easy compared to other things ive written. It was much harder than i thought because when you start writing it down and you start trying to give an account of the main things in his life, things he thought, things he stood for, things he advocated or defended, turns out they relate to one another mo