Morgan Stanley Investment Management Head of Emerging Markets and Chief Global Strategist and Author of ‘The 10 Rules of Successful Nations’ Ruchir Sharma joins the On the Move panel to discuss how government bailouts could be impacting capitalism.
ADAM SHAPIRO: Too much of a good thing with all of this stimulus? We want to bring into this discussion Ruchir Sharma, Morgan Stanley Investment Management Head of Emerging Markets and Chief Global Strategist, also author of "The 10 Rules of Successful Nations." I believe you are joining us from Delhi, India. It's good to have you here, sir.
RUCHIR SHARMA: Great, thanks, Adam. Thanks for having me.
ADAM SHAPIRO: So you recently had an op ed in "The Wall Street Journal" in which you talked about several things about capitalism and how the incredible response from central banks, going back to the Great Recession, even before that, have undermined capitalism. I just want to quote you real quick when you said easy money has juiced up the value of stocks, bonds, and other financial assets, which benefit mainly the rich. You also went on to talk about how that builds social resentment.
So we all get how that undermines capitalism. But in your column, there was nothing about what do you do for the millions of people who would lose their jobs if you allowed zombie companies to fail.
RUCHIR SHARMA: Right. So the point that I've tried to make here is this, which is that if you go back to the history of the United States, before the 1930s, there was no management of the business cycles. You would have a period where you'd have very sharp downturns, very sharp upturns. The positive was that the productivity growth used to be very high. But that strength was taken too far during the Great Depression, when you had no policy support, and therefore you had the Great Depression.
The point I'm making is that now we have swung to the other extreme, which is we have gone from a period where you have no intervention of the government to now a period where government intervention keeps on increasing with time with each business cycle. And if you look at the last expansion, it was well past the recession of 2008, 2009 ended that the Fed continued with its quantitative easing programs. You had low interest rates, well below the rate of growth, for a long period of time. And you also had just constant bailouts, that no matter who is about to fail, you want to constantly protect that.
So we can go on that path. But what I've argued in that essay that you're referring to is that the longer this continues, the worse it is for productivity. And why has productivity growth been so low over the last decade or two, even though we're in the midst of a tech boom?
And my point is that if you keep having this interventionist mindset and increased government involvement in the economy, and you do not allow the clearing of the dead wood, you will keep on having low productivity growth, which basically means lower economic growth, because that's the most important driver of economic growth.
JULIE HYMAN: So Ruchir, paint the picture for us, then, if you could, if it's even possible to do-- what would the last decade have looked like coming out of the financial crisis, let's say? Because I don't think you're arguing that stimulus wasn't necessary during the financial crisis and the Great Recession. But what if stimulus was tapered off? Because it never really was entirely, right?
RUCHIR SHARMA: Exactly.
JULIE HYMAN: Right. What would the economy have looked like, though? Because then wouldn't you have had to have had a more robust social safety net, for example, for the people who, as Adam was referencing, might have lost their jobs when those companies that were being supported went out of business?
RUCHIR SHARMA: Yeah, but I'm not sure that there is a tradeoff, that the companies go out of the business and so therefore people lose jobs. As I've documented in that "Wall Street Journal" cover essay that I wrote last weekend, that startups are getting crowded out. So if you look at the number of new startups in the United States, that number is falling over time.
So you have the rise of zombie companies, as I put it. These are companies which don't even make enough profit to pay their interest for three years in a row. So those companies keep rising. And it crowds out the new companies from coming up.
So I don't think it's fair to say that if these zombie companies were to shut down, it would lead to mass unemployment. That's not how it used to be. The statistic that I cite there is that in the 1980s, the share of zombie companies in the United States, for example, was just 2% of the total number of companies in the United States. That number, even before this pandemic, has surged to nearly 20%.
So 20% of all US companies today can be classified as zombie companies. Now in the 1980s, it was 2%. So something is going amiss in the system if this number keeps on surging over time.
JARED BLIKRE: Jared Blikre here. I hear you on the zombie companies 100%. But where-- at what point do you generate the political will to enact changes?
Because you've got market participants used to the Fed bailing out companies. You've got the companies themselves used to it. And then the Fed is increasingly involved in an array of markets that it was never really intended to touch before.
How do you break people off and get them unaddicted to the juice that the Fed has provided to the markets?
RUCHIR SHARMA: Yeah, it's the Fed. It's the Treasury. It's the government in general.
But yes, I think that the connection that people haven't made as yet is this-- most people, including the Fed, at the Fed, think that as long as you don't have high inflation, you can keep juicing up the economy with lots of free money, with lots of liquidity. The connection people haven't made as yet is that those policies lead to lower productivity over time. And that lower productivity means lower economic growth. And lower economic growth, obviously, means that the pie is getting smaller and smaller.
So I think that it is for the political class to understand this and to communicate this, that if you carry on with these kind of policies, we are going to be resigned to lower and lower economic growth. We had the longest economic expansion in the-- after the Great Recession, which was cut short by the pandemic. But it was also the weakest in history, in terms of it-- if you look at the average economic growth over that period-- partly caused by demographics, but partly caused by low productivity growth.
So we all sort of stress as to why can't we get the high economic growth rates we used to get? Even when President Trump came to office, he sort of raised the prospect that why can't we have 4% economic growth like we used to have? We never crossed even 3% on an annualized basis in any year over the last five years. The average growth rate was 2.3%.
So I think it's this recognition that if you're going to continue with these policies, there is a downside to it of lower productivity. And that is what the political class needs to internalize and communicate to the people, that if you carry on this way, we're going to move more and more towards the economies of Japan and even Europe, where you have lower economic growth for long stretches of time.
ADAM SHAPIRO: Ruchir, other than Germany, which saved in good times, as you point at in that article, can you give us an example of a government where they listened? As you said, the political class got the message? Because even here, Republicans are now spending money like drunken sailors.
RUCHIR SHARMA: Yes, that's so true. So I wrote this op ed last year, in fact, for "The New York Times," saying "The Happy Capitalists of Switzerland." I think it's time to look at where is capitalism still working? As I argue, in many parts of the world, including in the United States, capitalism has been deformed. Then what we have is a form of socialism-- possibly for the rich and the powerful, not for everybody.
But if you were to look at the places where capitalism is working, it is countries like Switzerland. And in the op ed I argued that if you look at Switzerland, its share of government spending in Switzerland is relatively low, at about 26% of GDP. And yet Switzerland is the richest country in the world today in terms of per capita income, along with Luxembourg.
And what has Switzerland-- Switzerland done right? It has a very effective government, but any focused government. And if you look at even in this pandemic, economies like Taiwan, Korea, which have handled this pandemic very well, a lot of people praised their governments for having done a good job. In all these instances, if you look at the size of the government, it's been relatively small, if you just look at the size of the government in the overall economy. But the government is very efficient and very directed in terms of what their priorities should be.
So that's what I'm calling for, which is that, yes, there is a role for government. But it needs to be directed. It needs to be lean and efficient.
And these economies, from Switzerland to Taiwan, have shown it, even through this pandemic, as to how you handle the situation well with having a small-sized, and yet a very effective government.
JARED BLIKRE: I just wanted to follow up on that. You mentioned some of the Asian countries that have dealt with coronavirus differently than a lot of the western ones. Even in Europe they've done some different things here.
But what is the ideal policy mix, then, that you would prescribe? Would it be anything? Would there be any liquidity backstop for companies that are-- that were thrust into a state of zero revenues?
RUCHIR SHARMA: Yeah, so I think that-- I make it very clear in the article as well that I'm not trying to invoke here the liquidation of the Great Depression. We just said let everything liquidate and we're going to have a Great Depression. During a recession, you need stimulus. You need liquidity backstops. That's fine.
But the issue is that you need to withdraw that pretty much once a recovery or a bounceback begins. I'm concerned today when the Fed tells us that come [INAUDIBLE] until 2022, we don't see any need to do anything in terms of with interest rates. And their entire focus is that as long as inflation is low, we can continue to juice up the economy by providing it as much liquidity.
And that's where I begin to get worried, that yes, intervene when you are in the midst of a crisis. But that intervention has its limits. And it needs to stop once the crisis is over.
And that is not what was done in 2010, '11, '12, when you had subsequent rounds of quantitative easing, even as the economy had recovered. But they were not happy with the growth rates being achieved. And they wanted to juice up the economy. There was no change in the economy's growth rate.
But yeah, what you have ended up getting is massive asset price inflation, where asset prices are so high. And I think that this is where we are stuck in this trap. Today, the size of the global financial markets is four times larger than the size of the underlying economy. Back in the 1980s, they were both around the same level.
So now you've moved to a situation where the tail wags the dog. Every time the market falls by 1% or 2% because lets say some stimulus is not being enacted, or the Fed sounds a teeny bit more hawkish, immediately there's panic. And the whole idea is that we need to act so that the market doesn't go down, even by 5%.
I think it's that mindset which needs to change, that this over focus on what the market is doing on a daily basis is in many ways one of the fullest effects of capitalism. That yes, the markets are a capitalist beast, but by sort of mollycoddling it, by ensuring that volatility remains so low, we are doing the opposite, which is in terms of making the beast bigger to an extent, but it's counterproductive for the core principles of capitalism.
ADAM SHAPIRO: Ruchir, as we've been talking, gold has surged. It's now over $2,000 a ounce, $2,009 an ounce. And as we wrap up, you said in your article without entrepreneurial risk and creative destruction, capitalism doesn't work. And let's hope the political class is listening.
We appreciate your being here. Ruchir Sharma, Morgan Stanley's Investment Management Head of Emerging Markets and Chief Global Strategist, all the best to you.