Interview: Ruchir Sharma On The State of Capitalism in America

Ruchir Sharma is Chairman of Rockefeller International and Founder & Chief Investment Officer of Breakout Capital. He is also an author and contributing editor at the Financial Times. Find his most recent book, “What Went Wrong with Capitalism” on his website. This interview was edited for clarity and conciseness.

Ari: What was the most significant thing that led you to question the common narrative about capitalism and to want to write a book about it?

Ruchir: It has a lot to do with my background. I come from India, a country that used to be very socialist. I grew up in India back in the 1980s. Socialism restricted people's economic freedom in India and kept the country poorer for longer.

I was always fascinated by the concept of capitalism from a very young age. In fact, I had a keen interest in economics and decided I wanted to learn much more about the different economic systems. The appeal of capitalism was that this system gives its people the maximum amount of economic freedom. It holds an intuitive belief that people do best when they are given more economic freedom, especially having seen what restricting freedoms does to places like India.

The idea for writing this book came about during the pandemic. I was aghast at] the way the government in America and many other Western countries went about spending money, thinking they can easily paper over lockdowns because they have endless capacity to print money, and can spend unlimited sums to  stimulate their economies–without consequences.

At the same time, the polling data was striking because young people in America were saying they've lost faith in capitalism and would rather have socialism. That's quite a telling statement, that in the beacon of capitalism young people are saying they would rather have socialism.

That's what really began this deep investigation into the question: do we really have capitalism anymore in America? Can we call this capitalism? Why are people so disaffected by it? I wrote an essay in the Wall Street Journal in 2020 for The Weekend Edition. It was the cover essay titled The Rescues Ruining Capitalism.

That began the journey of this book, which is a long look at the historical narrative about the economic system we have, what's gone wrong with it, if we can still call it capitalism, and what has ruined capitalism. The tagline of the book says that capitalism didn’t fail; it was ruined.

Ari: What went wrong with capitalism in America? Do we still have a capitalistic system?

Ruchir: 100 years ago, government spending as a share of GDP was 3 percent. And the role of government was minimalist. They did the basic stuff, spent a bit on defense, and then left the entire economy and society to do what they wanted.

Then we had the Great Depression, beginning a gradual march towards an increased role for the government. In the last few decades, that role has expanded dramatically. There's a lot of talk about the deficits and debt that America grants, but the problem is much bigger than that.

It's the suite of government habits, the amount they regulate, the way they are inclined to bailout private sector companies at the slightest hint of trouble, and the micromanagement of the business cycle because they don't want anybody to fail.

The socialization of risk in this country has lots of perverse consequences. The result is that not just Republicans or Democrats are feeling terrible about the economy. Six out of ten independents also feel the economy is moving in the wrong direction.

The book is an examination of how we got here and how the government's role in the economy has progressed. It's analogous to the “revolution in pain management” in medicine. The origins of the opiate crisis lie in the idea that every time someone suffers from even minor pain, you give them heavy doses of opiates. Then, they become hooked on opiates.

The same thing has happened in the economy. Every time it faces the slightest trouble, the government intervenes massively, with stimulus or in some other ways. At the surface, it appears things are okay. But deep down, the system has become addicted to state support.

Ari: How is your thesis different than the standard libertarian approach? They say capitalism works best when it isn’t impeded by “big government.”

Ruchir: There is no return to 19th century laissez-faire capitalism. Society's changed and democracy’s changed. To go back to a system where there is zero welfare state or zero intervention, I think that's too extreme a step. It's almost too idealistic to ask for.

This should be a course correction. We have moved from laissez-faire capitalism, let's say 100 years ago, where everybody was free to do whatever they wanted with no government involvement to today, where capitalism seems to only work on the upside.

There is a role for government support during an outright crisis, whether it's financial or social, but the inclination of government to intervene at the slightest hint of trouble is leading us into bigger messes.

One of the big paradoxes of our time is that we're in the midst of this massive tech revolution, yet productivity in America has been declining. The key to economic growth is productivity — save for the odd times like the tech boom in the late 90s, when productivity surged. And now we're seeing post pandemic increases as some churn has happened.

Generally, the trend in productivity for the last 30 to 40 years has been down. There's something wrong with capitalism when productivity growth is declining. I associate that decline in productivity growth with the fact that the government is intervening and destroying the creative-destructive nature and fiber of the economy. That’s the message of the book.

How do we return to some sort of middle ground, between the two extremes, to make sure America remains the beacon of economic growth and success for the world?

The first step to a cure is to diagnose the problem. The problem we have today is people have the wrong diagnosis. A lot of people feel capitalism has failed because there's too much greed, and inequality. So, the government needs to fix those issues.

Ari: What are three actionable steps forward to fix the capitalist system in America?

Ruchir: First, is the regulatory culture. Over the last 20 years, America has been implementing 3000 new regulations a year. The cost of regulatory increases has gone up substantially. How many have they withdrawn over the last 20 years? 20 regulations. This really hurts the average person.

For example, look at the amount of time an average employee spends at work dealing with legal compliance courses or red tape-ism, it’s been estimated at 16 percent.

For small business owners, it's become so much more difficult to set up your own business. Big businesses benefit from regulation. That's the fundamental thing we don't internalize. Regulation is pro-incumbent and pro-big business because the more we regulate, the more difficult it becomes for small and medium-sized businesses to penetrate the system.

The big companies, given lobbying power in Washington, are able to write regulations to be more in their favor. That's how regulation has a perverse impact.

Second, we need to get out of this bailout culture. The government's implicit guarantee to businesses is that, at the slightest bit of trouble, we’re going to bail you out. By doing that they're keeping alive a lot of the entrenched players, preventing new startups and undermining small challengers. The number of startups in America right up until the pandemic had been declining.

Third, get control over government spending, which keeps increasing year after year–a point that has been much more in the news. The attitude now is debt and deficits don't matter. We can keep on spending because all these people have been crying wolf about this for decades, and nothing has come of it.

These are the three focus areas to at least begin some course correction.

Ari: What do you think Trump and Biden get right and wrong about their approach to the economy? Recently, Trump said he wants to get rid of income tax and add more tariffs. He also wants to lower the corporate tax. Are any of our candidates going in the right direction?

Ruchir: Unfortunately, no. They both served one term. We know exactly what their track records are. The dispiriting part is that the emphasis changes, but the basic pattern doesn't change.

Trump spoke in his first term about reducing the number of regulations. He started to do that, but at the end of his term so many new regulations had been passed that there was no big change in the trend of the number of new regulations. He cut taxes, fair enough, but didn't touch spending because it was too politically hard to do. There was no talk of entitlement reform.

Biden has gone to the other extreme and decided he's going to do industrial policy. He has spent much more than any of his predecessors and is going to double down on what's already happened. That's even worse.

I feel dispirited because the only way any country changes — just look at the historical track record — is when it is forced to change. Until then they keep doing what, at the surface, seems to be working. It's too politically difficult to make any other decision.

Ari: The Tea Party was a moderating force of the Republican Party that always called for less spending, but it’s lost influence and been replaced by the new populist right. Do you think this new faction of the Republican Party is going to exacerbate the problems you're talking about? Or do they have the potential to fix it?

Ruchir: No, I’ve seen nothing that gives me confidence that someone’s going to fix this. That's why I wrote this book. I'm not sure who is going to fix it. Let's at least try and get some agreement among people about what the problem is.

The problem from both fronts tends to be, in different ways, to intervene more. There are those on both sides who classify the last 30 to 40 years as some neoliberal era that was terrible for America. I agree, there were some aspects that were neoliberal, such as globalization and the deregulation of financial markets, in particular. Also, the fact that many developing countries like China and India moved from a socialist to a more free market path.

But the other stuff is just a myth. The neoliberal era is often associated with much greater deregulation. It is associated with the government withdrawing its role. But there's no evidence of that. Look at government spending; look at the culture of bailouts, which became popular only after the 1980s. Also, the Fed’s role has become more and more expansive in the economy. All these can hardly be termed neoliberal policies. And yet, that's the impression most people have of the neoliberal era.

Ari: People don’t want to talk about the growing national debt because it's not pleasant to think about. What is the future of America going to look like if we don’t start taking the national debt more seriously?

Ruchir: You're correct that, partly, a lot of people don't want to talk about it because it sounds like crying wolf. From the time I came to New York in the 90s, I used to see this debt clock in Times Square. Fears about debt and deficits have been with America for a long time. The problem is none of it has led to a debt crisis. So, the belief is that America has different rules for itself, and it can keep running this way for as long as it wants to.

It's linked to the fact that approval ratings, whether it's Biden or most leaders in the Western world, are close to record lows. About 70 percent of Americans now say they want the economy to go in a different direction or for the current system to be torn down.

The obvious consequence is if we keep doing this, it's going to lead to a debt crisis. America is running budget deficits today at six percent of GDP, way higher than any other developed country and twice as high as what it used to run in the last couple of decades.

My argument goes much beyond that. It's not just about government spending, it's the suite of government habits. The suite of government habits has to do with regulating, bailing out, micromanaging the economic cycle, the role of the Fed, and this asymmetric reaction where the government says, “Okay, if you're making profits on the upside, it's okay, but on the downside, I'm here to back you and the perverse outcomes that this is leading to.”

Ari: What advice would you give to Generation Z as they grow up and realize maybe things aren't as easy as they were for their parents or grandparents?

Ruchir: I have some hopeful messages in the book. I have an entire chapter about where capitalism is still working. I cover countries like Switzerland, Taiwan, and Vietnam. Switzerland is a great example. This is a country where there is a lot of economic freedom and some government roles, but they get the balance correct between light touch regulation, some welfare, and government spending–which is manageable as a share of GDP. 

I offer the examples of Taiwan and Vietnam even though they're not as rich as we are in America. But these are countries that show if we give people enough economic freedom lots of positive things can happen. In a way, capitalism is still working in those countries.

Taiwan is a great case in point. If we look at their government spending as a share of GDP, it is only about 20 percent. And yet, they're able to do a lot with that 20 percent. You don't have to just keep throwing money at the problem. You're able to get the balance correct. Taiwan is the rare example of a developed economy in which productivity growth is still strong.  

The message here is first, let's diagnose the problem properly. Then, figure out what the solution is. America has many strengths still going for it. Capitalism in Europe is in even worse shape than capitalism in America, in large part because its governments have grown even larger, more overprotective. Building an even larger government in the United States is only going to make us more like Europe.  

There are still lots of strengths in America. It remains a magnet for talent from all the world, the center of tech innovation. Keep the faith that economic freedom can still lead to positive changes, and you build on those strengths. But if you continue with the status quo, the consensus support for bigger government, you’re going to make the ongoing crisis of capitalism that much worse. 

Ari: Who is going to make the changes that need to happen? Is it going to come from the president? From Congress?

Ruchir: I don't see any figure as of yet who is going to make these changes. What I hope to have done is to have gotten the diagnosis correct. I don't see anyone as such who agrees with me completely.

This is a non-conventional view because the conventional view is that America is, on the surface, doing okay. But beneath the hood, all these problems are there and I think people feel it.

This book is an ode to capitalism. It says how much good capitalism can do if it's allowed to work properly. It's about getting the balance correct. We can never return to a laissez-faire capitalism. It's about making people aware of what the problems have been in America, why people are so disaffected, what the path could be, and shining a light on where capitalism is still working.