politics

Reality Over Influence with Erik Fogg

TWS 19 | Reality Over Influence

 

Your reality is shaped by your education, where you live, and what you consume. How do you view people with different beliefs? Is there a way to bridge the polarity in society? And, how should an entrepreneur respond to influence? Patrick Donohoe gets the answers from Erik Fogg, an author, CEO, and co-host of the ReConsider podcast. Erik introduces his book, Wedged: How You Became a Tool of the Partisan Political Establishment, which talks about the way you can open your mind to the manipulation and fight your way out of political polarization.

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Reality Over Influence with Erik Fogg

This topic may not seem that it has anything to do with the entrepreneur, but I believe it has everything to do with it. My guest, Erik, is in the political arena. This arena is for the most part psychological as it pertains to what we hear and what is represented. I believe that is a skill of the entrepreneur to understand what is hyperbole and what is real and applicable. It takes some discipline when it comes to understanding yourself and how you’re wired. How you’ve been influenced in the past and also the person that is communicating with you. What are they are influenced by and why they are speaking to you? I believe psychology and influence being used all around us without being that known, being that conspicuous. There’s a documentary I saw called The Great Hack. The documentary was fascinating. It’s on Netflix. It’s a group that used big data as well as artificial intelligence to be very strategic in the way that they marketed during the Trump campaign and previous to the Trump campaign, Brexit and some other elections.

These days, I know we’ve heard big data, I know we’ve heard about privacy and we’ve heard the Facebook inquisition and so forth. Our information is everywhere and it’s being used for a strategic advantage of whether it’s marketing and companies or in this case, the political environment. Being aware of that is very important, but also it’s the psychology associated with your understanding of yourself, your perspective, where it stands and then being open to other’s perspectives then weighing everything and then coming up with a decision. This is crucial. I believe in times of crisis and times of chaos, there is a lot of opportunity, yet there’s only a small percentage that capitalizes on that opportunity. I would argue that that percentage understands themselves so well that they aren’t necessarily influenced by the emotional side of things, the rhetoric.

They are able to understand that and hear what’s being said but not necessarily come to a conclusion. Erik and I had a great discussion and I’m going to end my introduction of him with a quote that I found. He says, “The problem with the world is that the intelligent people are full of doubts while the stupid ones are full of confidence.” It’s very interesting. Thanks again for all the support. If you like what you read, go check out the previous episodes. Give us an awesome review on iTunes. I’d be so grateful if you did, so thank you.

Most of you know that I wrote a book called Heads I Win Tails You Lose: A Financial Strategy To Reignite The American Dream and the book has sold tens of thousands of copies. We’re excited about it. For those of you who are new reading and haven’t had your chance to pick one up, you can get it for free. If you head over to TheWealthStandard.com/book and all you have to do is pay for shipping, you will get your copy for free. Thanks for the support.

My guest is Erik Fogg and I’m excited. We had a brief conversation and it’s made me even more excited. Erik, thank you so much for spending the time with me. I can’t wait for my audience to read this and learn from you.

Patrick, it’s my pleasure. I’m looking forward to this one for a while.

There is a gap between reality and what is projected into the national conversation. Click To Tweet

The first thing that would help the audience is if you were to maybe describe or characterize the message of your blog, the book that you came out with years ago, what were you trying to achieve? What did you want your audience to walk away with as an understanding or a new view of the world?

I’m glad that you pointed out that it came out years ago because I have a little bit of political history cred now and I was concerned about the political polarization before it was cool, before coming as a team. One of the reasons it’s so important is that I was able to get it out before it reinforces the fact that we were able to do this analysis and the book about political polarization in the United States before Donald Trump was elected, before we saw schism play out in the American electorate. Being able to do that analysis beforehand shows that this has been coming, that Donald Trump’s election and the polarization around it is a result of an ongoing process as opposed to the cause itself.

What we explore in the wedge is what are the forces and incentives in the United States political election system and media around politics that drive us towards choosing these tribal sides and treating politics like a war rather than treating it as a discussion? The big thesis in the wedge is that most Americans have nuanced contradictory, not always necessarily moderate, but often mixed views about how they feel about issues. Many Americans have very moderate views. Not all do, and that’s okay, but that is not reflected in Congress and it’s not reflected in the national conversation. We can talk about as much of the theory behind this as we want, but the big insight is that there’s this gap between reality and what is projected into the national conversation.

Where do you feel these realities come from? It’s so widespread and I’ve thought about this before as how a big group of people comes to do a way of doing things that’s similar. My kids right now are in school. I look at the school system. It was Horace Mann who brought this whole Prussian idea of the school system where it was going to a more regimented, dictatorial, hierarchical structure in which teachers are placed in this very elite role and essentially teach people. The whole theory is that it’s to train workers, to train military people, to be told what to do. You look at going through elementary school and then junior, middle school and then high school and then even college. It’s the repetition over and over again of being told what to do and told what to think. You have to do this in order to succeed. It’s interesting how that plays into our ability to look at what you described as reality. That’s what most people’s reality is. At the same time, it also helps us understand why we’re in the situation we’re in, the political scheme of things.

We don’t bring up the US education system in the book in particular because it’s one of the constants throughout this change period that we’re talking about. The period we’re talking about starts in the early 1990s where we start to see this weird divide happening. A good example is as regards to abortion, the mix of policy ideas that Americans have has been constant since the 1990s, but there used to be much more of a combined identity around what my position was in abortion. Most people were pro-choice, but even though people want the same policies, there’s been this bifurcation of pro-choice for life. It’s about 50/50 now, even though everyone thinks the same thing, they identify differently now. There’s all that time period that we’re explaining. What is the thing that changed? Your point about education is interesting because of how it preps the human mind to respond to what it’s seeing in the media.

What is the thing that changed? What’s driving this split between narrative and reality? What we believe and what we hypothesize in the book is that changes in how media is consumed are the primary driver. If we think about how the brain is prepped and then we think about how media has changed, no longer do we consume media in these long forms of newspapers. We consume media, both television media and internet media in very small chunks that activate a very different part of the brain. They activate this very instinctual, immediate responsive part of the brain, which is a different literal region of the brain that is activated during reading a newspaper. That part of the brain is very responsive to emotion, it’s very responsive to anger, fear and frustration.

TWS 19 | Reality Over Influence

Reality Over Influence: The education system wired us to do as we are told. It has prepared our mind to respond to what we are seeing in the media.

 

If we think of, for example, the incentive of an online newspaper, what they need to do is get you to click. They need to get you in for a few seconds so you see the ad and you ship out. In the shorter attention span mechanism, the tools that are being used to drive revenue for a newspaper are the tools that get you to click, which are the ones that activate that smaller instinctual part of the brain. How did they make money? They make you angry and they make you scared. That is the process. That’s the mechanism. It’s not necessarily anyone’s fault. There’s no bad guy. It’s incentives that have led to how our emotional relationship with politics has changed.

Politics has become much more about the psychological narrative than anything else. It’s clear to those who understand what we’re talking about, where there are triggers that get some chemicals in our brain, things to fire and they don’t allow for rational, critical thinking. Donald Trump is the epitome of this. I don’t think he cares as much about what he says as the reaction he wants. He knows the reaction he’s going to get and it’s fascinating that people still buy into it. If you look at all the information that exists, whether it’s the internet or social media, there’s so much. I’d say our mind is defending ourselves from taking anything else in. That’s why we are so influenced way more than we think, whether it’s by the artificial intelligence that tells companies where they should place ads, how the color scheme should look, what time of day they should be posting, the different ages and sexes and socioeconomic situations.

There’s so much data out there right now that there is strategic influence every minute of the day, it seems like. Most people are ignorant and naive about that. That’s what I would say is scary but also good that you’re blogging, you’re talking about this because we have a huge election is coming up in 2020. Based on you writing this book years ago and how things have evolved and compounded, I can’t imagine what the rhetoric and the narrative and the psychological ways in which people are being swayed one way or the other.

Your example of advertising is so potent for this because it’s the exact same mechanism, techniques, technology, data that are being used in the political sphere to influence how you relate to political parties. What causes you to donate, what causes you to vote, what causes you to read this article are the same techniques used to get you to buy a thing, to click an ad and buy a new product that’s being advertised to you based on all this data. It’s these micro-manipulations to a point the saturation of micro-manipulations that we’re facing from these systems is overwhelming that we can’t process it, we can’t become aware of it. In particularly because they’re designed to influence that smaller part of the brain that is instantaneous, instinctual, quick-action thinking, it never actually makes it to the part of the brain where we fully process it.

It’s happening to us all the time and we don’t notice it. You’re banging on about that and you brought up the president. He’s trapped in the same cycle that everyone else is in terms of what does it take to get elected with this new technology and with these new techniques. He happens to be a master at using it. Whether that’s broken clock is right twice a day, whether he’s a mastermind and understands psychology at a level that other politicians didn’t, it doesn’t ultimately matter. It’s a technique that worked. The real tragedy of it is that because politics is a zero-sum game because there are exactly 535 members of Congress and one president, it means that the person who’s going to do this best for each of those seats, he’s the one who happens to win. We can’t ask politicians not to do it. We can’t wait for a hero to come save us because the ones that don’t do it, that don’t manipulate us will continue to lose.

How have you got to this point? I would say the problem isn’t necessarily just politics. The problem is how we’re influenced and we don’t even know that we’re being influenced. That’s why I look at so many unintended consequences of following this trail of thinking or following this group or following this narrative and what that takes away from a human being’s ability to think through and rationalize and understand for themselves. How did you get to this point? Was it a book? Was it an event that you went to? Was it an experience that you had in school? What led you to view the world this way to the point where you’re writing about it, you wrote a book about it, you’re blogging or podcasting about it?

The problem in our society is how we are being influenced without even knowing it. Click To Tweet

As much as I would like for it to be that I have some Socratic wisdom and some ability to rise above it all that everyone does not have, I super don’t. I have in time started to see where I’m being manipulated by this because I have my emotional reactions and my own biases, my own desire for something to be true and revulsion of some other facts. The thing that caused me to start to see that something was afoot was when I went to college. This was in 2005 in the city of Boston. I had grown up in a farm town in Pennsylvania. I grew up in a very red part of the country where everyone around me was great people that worked hard. They cared about their families, they cared about the country and they cared about helping people. They volunteer as firefighters. They gave money to feed the homeless and the poor. They’re wonderful people, and they hated the left. They vilified them and said, “These people are monsters that hate America and they want to do all these bad things.” Of course as a child, I was very impressionable. I was like, “That must be true.”

I then went to Boston and I ran into a lot of people that were very smart and cared about the country and wanted to work hard and wanted to help people that thought totally differently about all these different policies and hated the right-wing. They are monsters and they want to destroy America and hate all these groups and all this stuff. I was at first very defensive of conservatives where I grew up, but then when I started to come to love the people that I had met in Boston, I realized they were wonderful people too. The Boston people are wrong about the farmers in Pennsylvania and the farmers of Pennsylvania are wrong about the people in Boston. They hold these concepts of monstrosity so deeply. I used to until I had met all these people in Boston and I wonder, “How did that happen? What drove that?” Because disagreeing is one thing and even disagreeing fiercely is one thing, but to believe, and we have good data this in the book, that people in each party believe that other people in the other party have terrible intent, that they’re out to do bad things. How did that happen? That’s the first part I researched. Was this true? Yes. What must be going on? It was a three-year project to try to dig into what causes this divide of heart much more so than the divide of policy in mind.

It’s fascinating that you’re saying this because I was watching something with my wife. It was four days after 9/11 and it was an interaction between a Muslim person and an Orthodox Jew. Talk about extremities. You look at left and right at Pennsylvania versus Massachusetts, but this extreme view led to the exact same conclusion. Both wanted the same outcome, yet they became so involved in their group and the notion of group psychology programs the same thoughts and the same feelings over and over and over where they’re a part of us. We don’t know why we’re reacting the way that we are. We just react that way. If you’re aware of that, then it allows you to question the assumptions associated with what you believe and why you believe it.

It’s not to say that what you believe or don’t believe is true or false. It’s taking ownership over what you think and what you believe. That’s the ability we have. We all have to realize we’re human and we have been influenced as an American and me as a male. I grew up on the east coast, but I live in the West now, on the west coast. We have all these influences and we form a perspective of the world and that’s how we wake up every single morning. If we’re not aware that the majority of our life is subconscious and we’re just going to respond and react to things when it comes down to these very critical votes or critical things that we’re stating or that we’re trying to pursue, that we’re perceiving, we’re going to buy into what all our past has programmed us to do.

The transformative moment for most people in my experience, including me, is the moment that you’re in a state of mind that through whatever preparation, perhaps reading a book, perhaps reading this blog where you’re curious. You’re like, “Maybe this is happening,” because we know that it’s happening with advertising. We know that it’s happening about what we buy. We now have this thought, “Maybe this is happening in politics.” With that mindset, you go on your Facebook feed, what’s the stuff you’re normally clicking like on, that you’re normally sharing, that you’re normally reacting and you go, “This must be true because it makes me mad and I’m going to tell the rest of the world.” You question that once and go look it up and go do some digging and go see, “Maybe this is designed to manipulate me.” Understanding the mechanism of how it got to you in the first place is important, but when you see, “In this one instance, I reacted in a way that someone designed me to react in order to get me to do something for them.” That’s the transformative moment we realize, “This is happening,” and then you’re prepared. You have the spine and the knowledge to begin to resist it and filter through it in the future.

TWS 19 | Reality Over Influence

Reality Over Influence: Allow yourself to question the assumptions associated with what you believe and why you believe them.

 

This is what I’ve seen in myself and it’s a flaw that I’ve noticed where I have these biases, these cognitive biases to those that agree with me as opposed to going and checking my assumptions up against those that may have opposing views. As I’ve done that, people have a fear associated with what another group or another philosophy or another perspective is. I’ve found that in myself as well. What are you doing to check the other side too, to check your assumptions? Your book, your podcast and your blog are going to start firing up in the next few months. How are you looking at ways in which you can objectively analyze something, think about something and talk about something so that the audience can get the upper hand in relation to taking your information and realizing that you’re biased, but your bias comes from starting out being unbiased, if that makes sense?

You’re always going to have a perspective, a belief, a conviction and that’s good. Being able to challenge your own convictions is probably the single hardest thing on earth. It’s a tall order. The beginning is when we start vilifying the opposition outright, because when we vilify the opposition, when we fall into these tribal politics that you talked about, it blocks us substantially from being able to consider that they may have an opinion that is valid ever, because they’re bad people. What they think is bad, it’s to hurt people.

When we peel that away and we start to think, “Maybe people ran into what they believe in a similar process by which I ran into what I believe,” that’s the first step to being able to start thinking about different people’s opinions in terms of them being opinions in and of themselves. They may still be wrong, but they are ideas and that they are not the reflections of evil. Not that there aren’t evil people up there if you think within the middle 80% of how the country thinks about stuff. Step one is that we isolate the opinions of the people. The other path to being able to challenge my own biases is to ask, “How did this other person who disagrees with me so much about immigration, about the economy, about gender relations, something, how did they get there?”

You can think of this as a study of another person and it can even be a thought experiment. You don’t necessarily have to interview them or if you know someone, that’s even more helpful. Once you’ve been able to go through that thought experiment and derive a reasonable narrative for how they got to where they got to, other than sitting down and thinking, “I want to hurt people,” once you’ve got that firm, you can then turn it on yourself. Then you have the tools to ask, “How did I get to what I believe? What influenced me to get here?” Similarly, with the first layer of this, which is the anger layer, when we see the process and the mechanism by which we reach wherever we reach, we become less firmly attached to it. It becomes less something that’s part of our identity and something that’s more its own thing that exists. The key is extracting the idea, extracting thought from our sense of identity. That opens our mind to be able to then think critically. Changing our mind, doing the study, that’s the long work. It’s not the emotionally hard work, but that’s the long work.

What have you seen as some of the success of your podcast, your book, where someone had a certain point of view, a way of looking at things and they’ve realized how they’d been influenced and swayed by this political narrative or that political narrative and a can-do and understanding that’s different? I look at most people consuming this information won’t do anything with it. They’ll listen to it and say, “That sounds interesting,” but because of how hard-wired and program we are, they’ll show up tomorrow and respond and react to this the same way they’ve always done. That’s where the notion of a pattern interrupt or a shift in thinking allows us to go about life with maybe a different tweak to the way in which we make our assumptions. Going to the successes you’ve seen in people and how they’ve been able to understand things at a higher level, maybe talk through that?

The way I like to say it most about how we react to hearing something like this, what you and I are talking about is something that generally at the level of nod and then walks away, everyone would agree with or almost everyone in group. They’d say, “That’s great. Those other people who are super wrong, they need to hear this.” That’s the first thought that we’re going to have, is that other people need to hear this and they need to fix themselves. “They can be more like me,” which is correct. It is hard work and part of the problem is that it’s not fun. It’s fun to be right. It’s fun to fight a war. We love fighting wars. We’re very tribal people. We love having an enemy and we don’t have the communists anymore. We don’t have the Soviet Union, so were’ turning on ourselves. I digress a bit. The best story that I see people change on repeatedly, it’s because it’s the first chapter in the book.

People ran into what they believe in a similar process by which you ran into what you believe. Click To Tweet

We lead with it because it’s the most intractably emotional topic I can think of, which is abortion. People are like, “I don’t even want to talk about it,” but we’ve got people into it. The success stories I’ve seen are that someone starts off saying, “I am pro this. Anyone who is not pro this is bad. They either want to murder babies or they want to oppress women. They’ve got a war council about how to oppress women that had murder babies. That’s their plan. This is based on reader feedback and listener feedback. After reading that section on abortion, one of the things they realize is that the vast majority of Americans want abortion to be open and legal most of the time and they want to have some restrictions usually on timeline. They sometimes disagree on that timeline. Should it be 20 weeks, 24 weeks? The vast majority of Americans, whether they call themselves purchase or pro-life, we believe in that.

When you’re at your protest rally with your tribe and you’re saying, “End abortion, abortion is evil,” or you’re saying, “Free and open abortion always,” when you say “never” and “always,” you’re going to create a reaction. When you sit back and you read that most people want it to be legal most of the time, the people who read it then go, “That’s me too.” I also want it to be legal most of the time. The readers get that and go, “We can all sit down and say we can make it legal most of the time. There some tweaks to figure out. We’ll probably fight about it, but most of us want to be legal most of the time. What are we even fighting about?” That’s where people start to change everything because we’ve taken the most terribly, intractable emotional identity, politics, life and death, feminism and patriarchy issue and realize, “As far as policy, we’re not that far apart on it. It’s just stupid branding.”

It’s interesting that you have these two forces, the force of wanting to be right in the chemical reaction you get to being right and winning. We all know what that feels like. There’s this other side of the spectrum, which is the fear of being wrong. Nobody wants to be wrong. You have these two forces that essentially are converging and creating these absolutes, absolute this and absolute that because you want to avoid the feeling of being wrong and feel what it’s like to be right. Those are very animalistic types of responses. We’re all included in this because I react animalistically as much as everybody else does, but it’s being able to take these very critical things, these topics. They have to do with our lawmaking and the future, whether it’s our future, our kids’ future or the future of our society. These are very important issues. Being able to approach them as unemotional as possible is vital. What’s coming down the pipe is probably more artificial intelligence, more computer learning and more very strategic influence that is going to get us to buy into our tribe and if we’re on the fence, buy into some tribe.

Your point about that buy-in represents the biggest strategic challenge to this and the third fear people have, which is the fear of losing influence in stuff that they care. Because what people rightly understand is that, “If I misalign, if I don’t align with a tribe, I’m not able to create the collective power. I’m not able to replicate the collective power that the tribe has.” There’s an incentive to our own beliefs to a tribe because a tribe when it’s big enough and angry enough can get something done. Whereas if we’re sitting out in the middle going like, “It’s complicated.” It is real that the people sitting out are saying, “It’s complicated,” they’re not getting much done.

The hardest part is if you ask an individual to let go of the tribe and be independent, there is a good reason for them not to and that’s the structural thing that we need to change. I do think that there’s this individual perspective and the peak way you can operate right now is to have a bit of emotional detachment where you understand what’s happening. You don’t get caught up in the BS and the propaganda as reality. You still need to pick a tribe. It’s tragic. It’s unfortunate you take the best thing that you can, but the structural change that will allow people to let go of this is going to be a deeper structural change in how we vote and how we set up parties. They’re going to probably have to be some constitutional changes to allow people to have more than two tribes to pick from. There are a little more dynamism and a little more fluidity to represent the real nuance and difference that people have.

If you think of the Republican Party, when Mitt Romney was running for president in 2012, he was very pro-immigration and he was very pro-free trade with other countries. He was very anti-Russia. Obama gave him a hard time on all three of these. He said that his thinking about Russia was backwards. He said that too much free trade is bad for labor and too much immigration is bad for labor and now the two parties have flipped. Even within the Republican Party, you’ve got this pro-free trade, pro-immigration side and an anti-free trade and anti-immigration side. Somehow they’re in the same team. It boggles the mind that they can somehow get along, but because that tribal cohesion and strategic imperative is so powerful, they want to stick around. Whereas if we can structurally change something to let them get divorced and let them have their own parties and advocate for their own stuff, it means you don’t have to have this weird suborning of what you think to whatever dominates the party to get in time.

TWS 19 | Reality Over Influence

Reality Over Influence: Once you understand the thought process someone has to go through to reach their beliefs, you start seeing their beliefs as not who they are but something that just exists.

 

What do you see coming down the line in that regard? As you look at how much money in influence and resources behind these two dominant parties, what’s going to cause them to create factions within themselves or something else to be as influential or start to pierce that veil? People are fed up and the animosity that exists toward all politicians, whether it’s left or right, is probably at the highest levels ever. Are they going to stay the same? Are they going to change? What are you seeing?

Historically, we have had realignments occur where if you get Republicans, they used to be a left-wing radical liberal party. One of the major shifts that occurred was during the 1960s when essentially the Republicans moved south, the Democrats moved out of the south and they realigned to how they think about a lot of stuff. We could have a realignment. I happen to think that in 2016, it would be a lopsided victory for Hillary Clinton. My preferences aside, it’s what I predicted. I was super wrong. It usually takes a serious trouncing of a party to trigger a realignment of that scale. The state of Maine has experimented with rank choice voting. They passed that in a referendum. They’re implementing it in their congressional presidential elections. Thinking about rank choice voting, let’s say you want to vote Jill Stein, but you don’t want Donald Trump to get elected.

Strategically, the right thing to do is to vote for Hillary Clinton in order to keep Jill Stein, in order to keep Donald Trump from getting elected. You don’t vote for Jill Stein, so the Green Party doesn’t get your support. Whereas in rank choice voting, you could vote Jill Stein one, Hillary Clinton two, maybe even Gary Johnson number three and then Donald Trump number four and rank choice voting sorts out such that you voting Jill Stein one doesn’t hurt Hillary Clinton’s chance to beat Donald Trump in case Stein does not win. What that does is it changes all these incentives where you can prioritize someone other than your second least favorite choice. Let’s say Hillary Clinton is your second least favorite choice, but Donald Trump is so much worse for you. You have to prioritize Hillary Clinton. In this rank choice voting feature, you could prioritize the Green Party if that’s your thing. All of a sudden, that leads to a proliferation of parties and ideas that people can then bounce around between and have a few more nuanced ideas besides this seemingly black and white, two ways of looking at the world, which as we discussed, even within the Republican Party alone, it’s not consistent.

Has that been adapted or is it still in that theoretical stage?

It has been adapted and then it went through a legal challenge. The legislature voted down and then the Supreme Court got involved. It is back. It is something that the system will push back on. The two dominant parties, the one thing that we’ll probably agree on is that they don’t want this to happen. The historical moment that needs to happen in order to drive a shift of that magnitude is something like the progressive era of the 1920s. The 1920s post-Gilded Age was when enough people got sufficiently fed up with the system as a whole that they reformed a lot of stuff. They reformed how the Senate works, they reformed how elections work. Women voted and all this crazy stuff, but it all came through from the bottom up. The path forward comes through a reform movement that works on the system as opposed to on specific policy.

Nothing’s going to change from the top down. It’s all going to happen from the bottom up.

People fear losing influence in the stuff that they care about. Click To Tweet

The incentives aren’t in place for it to come from the top.

This has been awesome. We haven’t talked politically on the show. It’s been more business and entrepreneurship and more theory. I look at coming down the line in 2020 and I’ve watched some documentaries and became aware of certain things. From an individual standpoint, the saying that I’ve always heard is, “I’m one person. What difference can I make?” The individual has way more power than they used to have, with their ability to communicate, with their ability to express themselves and with the ability to start a conversation. We have way more influence than we think we have.

I look at what’s coming down the line and starting to become aware and educated and figuring out ways in which you can be influential is vital. I see the world is changing so rapidly on a daily basis. Politics and law, having that type of structure is I would say necessity for a civilized society. I feel like change is brewing. I don’t know where and that’s why we need to talk about how the audience can follow you and how can they get the book? What are ways they can keep up to speed with what you’re seeing so that they can circumvent some of the legwork they have to do on their end?

The one plug I’ll make for why your audience should care about this as a whole, regardless of whether you buy my book, I don’t care. I have my own startup, I make my money doing tech things. There’s no money in books. Buy my book or not, I don’t care. The reason you should care about this is that you are an entrepreneur. You’re a business owner, you’re a stakeholder in this system. Completely and selfishly, the United States political system doesn’t fix itself. There’s going to be a lot of trouble for the economy, frankly. There are a lot of reforms that need to happen to make it work. I don’t want to play armchair economist too hard, but there are dangerous signs about how we’ve been managing the economy from the federal level. They are due to the fact that we’ve spent our time being distracted about stuff such as immigration at the southern border and abortion perennially and whether Donald Trump is a Nazi or not perennially.

Those distractions mean that we’re not actually as a populace advocating for the changes that we need for small business owners or for the bread and butter engine of the American economy. That’s not happening. We are too distracted to do it. Of course, depending on how you feel about it or depending on how you think about it, does that leave the door open for certain special interests to pervert the economy to their interests, against the interests of the whole?

It’s this sleight of hand.

TWS 19 | Reality Over Influence

 

Even selfishly, even beyond we as entrepreneurs are major actors in the system and have a duty to have a public life, there’s private interest in this as well. Hopefully, that resonates to the audience pretty well. The way you can find us if you want to read a little bit more is ReconsiderMedia.com. It has links both to our podcasts, our blog and my book. I would recommend a probably listening to some podcasts of choice first. It’s going to be the easiest way to get into it. We’re going to talk through a few issues, break apart some of the two-sided narratives about it, dive into some of the nuance and detail and it’s through that repeated practice. A lot of it is in economics. What we don’t want to do is tell you what to think. We try to avoid that as much as we can. We want to help challenge the narrative that you’ve been facing and arm you with the tools to be able to make your own mind up about what’s important to you, what matters and what reality looks like. It’s ReconsiderMedia.com. Come check out the podcast. It would be great to have you.

Erik, this has been awesome. Thank you again. Thanks for what you’re doing. It’s a great conversation. Best of luck to you. Maybe we should link up again once the political environment starts to heat up.

That’s a great idea. It’s off of my own show. I can riff a little bit more and we can talk about the election as it’s coming, which will be terrible, a lot of fun and terrifying all at the same time. I would love to come back. Patrick, you are even more incisive and insightful about all this stuff than I even expected. This has been a real pleasure. Thank you.

Erik, thanks again. Hopefully, we’ll talk soon.

Important Links:

About Erik Fogg

TWS 19 | Reality Over InfluenceErik Fogg is the Founder of ProdPerfect, Chief at ReConsider, co-author of the ReConsider blog, co-host of the ReConsider podcast, and author of the bestselling book Wedged: How You Became a Tool of the Partisan Political Establishment, and How to Start Thinking for Yourself Again. Erik is an MIT Bachelors/Masters grad, studying mechanical engineering and political science. He has 4 years of experience as an operations and engineering consultant with Stroud International, followed by an operations/sales executive role at startup HelmetHub. Erik interludes as political author, business book ghost-writer, and consultant for private equity and biotech.

Erik’s big ambitions are to use artificial intelligence to help large organizations and societies consistently identify truth from falsehood, and make better fact-based decisions

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A Conversation Around Politics, Entrepreneurship, And The Dynamics Of Capitalism with Peter Wehner

TWS 14 | Dynamics Of Capitalism

 

Capitalism is the greatest economic system in human history because it’s lifted more people out of poverty than any system in human history and allowed for the conditions for great human flourishing and great technological advancements. This is according to Peter Wehner, a New York Times contributing Op-Ed writer covering American politics and conservative thought and a popular media commentator on politics. Wehner is also a veteran of three White House administrations and author of the books Wealth and Justice, The Morality of Democratic Capitalism, and The Death of Politics. In this episode, he dives into the aspects and dynamics of capitalism.

Watch the episode here:

Listen to the podcast here:

A Conversation Around Politics, Entrepreneurship, And The Dynamics Of Capitalism with Peter Wehner

My guest is incredible. Probably the best top three interviews I’ve had. We are talking about entrepreneurship, but we also weave in capitalism. We talk about a lot of what the theme was in 2018, life, liberty and property. It was awesome to talk to this individual. He is super intelligent and very distinguished. Peter Wehner is my guest and he is a Senior Fellow at the Ethics and Public Policy Center. He also is a contributing editor at the Atlantic Magazine. He is also a contributing columnist for the New York Times. He is the former Director of the White House Office of Strategic Initiatives and Senior Advisor to President George W. Bush. He has authored a few books, Wealth and Justice: The Morality of Democratic Capitalism and The Death of Politics. Welcome, Peter. It is amazing to have you on. I’m excited about this conversation and to talk to you about your book as well as some of the things that you’ve been preaching.

Thanks for having me on. It’s a pleasure to be with you.

I talked to you a little bit about what we’ve been doing, which is focusing on the topics that include life, liberty, property from some of John Locke’s writings. As well as what capitalism is, entrepreneurship, and the framework where most people want to be a part of. Not necessarily just in the US but around the world. I look at what you’ve written about and understood it for quite some time studying and looking at where our society is and what has made us successful versus other nations perhaps. How have you come to understand capitalism in general and the aspects and dynamics of capitalism?

My belief is that capitalism is the greatest economic system in human history because it has lifted more people out of poverty than any system in human history and allowed for the conditions for great human flourishing and great technological advancements. Capitalism unmitigated and unrestrained has some problems. Part of what democracies and free societies have to do is to soften some of the rougher edges of that. That’s a prudential judgment. What does that mean? What programs have to be done to do that? You have to weigh the costs and benefits in terms of the effects on economic growth and all the rest.

It’s my belief that capitalism works because it’s most consistent with human nature. I’m a big believer in the idea that you have to confirm your economic and political systems to certain realities about human nature. I think capitalism accords to that and aligns with that. It understands as Adam Smith talked about what selfishness rightly understood is. You have to take into account what drives and motivates people that you can’t believe simply altruism, even though altruism is a part of human life and human experience. People act in ways that advance their self-interest rightly understood. You have to create certain incentives that will lead human beings to act in the ways that are both expected of them but also advances the common good.

I think the American understanding of capitalism, by and large, is the right one. Limited government entrepreneurship, free markets, skepticism about the ability of the centralized government to dictate decisions and believe that it has the capacity to anticipate and direct all aspects of human life. It has improved and right. There’s an epistemological modesty that capitalism understands, which is that you can’t get a small group of very bright people who can run economies. The way that economies work best is letting people by and large to be free to act in ways that want to act.

Let me go into two things that you had said because I find this interesting. It sounds like there’s this altruistic pull of human beings to be charitable to help others, to contribute, give back. There’s also this invisible hand, maybe more self-interested. It seems like those two things are pulling against each other. Are they mutually exclusive or is it may be a mischaracterization of those two concepts?

I don’t think of them as mutually exclusive. I think that they can be complementary. They’re distinct and they’re part of human nature. Think about your own life, the lives of your friends and your family, you probably see both of those elements in them. There are times in which you see altruism, self-sacrifice, selflessness, acts of charity, sympathy and compassion. Those things are real and they exist. They should be encouraged where they can. On the other hand, all of us act in our self-interest as well. That’s the way we’re designed. That’s the way that we operate. Most of life is acting in our self-interest provided that it doesn’t run over the rights of other people, and none of us are completely selfless, self-giving, completely compassionate and completely sympathetic. You have to take that into account.

The way that economies work best is by letting people be free to act in ways that they want to act. Click To Tweet

That’s not a bad thing as long as it’s channeled in the right way. The trick here is to try and take those human realities and direct them in a way that advances the common good. The founders understood this. Their view of human nature was correct, which is that people are capable of virtue and nobility but also acts of recklessness, irresponsibility and evil. You have to take both of those things into account. My own sense, I’m a person of the Christian faith. The Christian understanding of human nature is essentially correct. It’s that too, which is the advice and virtue are intermingled in people’s lives and in people’s hearts. It’s a complicated mix. People in different seasons in life lean in more of one direction than another. The challenge in individual lives, as well as a society, is to try and emphasize, give force and power to the higher things and to mitigate the lower things.

I do want to hit on a few of the things you said. Go to this idea of central powers dictating what people should do or taking care of them is the banner sometimes in which central governances is looked to as a virtue. What is it about that structure that people don’t end up liking? The ideal side of things that they push through or talk about sometimes is intriguing. I see why they would appeal to people, but when it comes down to it, why do people kick against that? Why does that impede human progress or does it?

Let’s take facts and circumstances. Sometimes when the centralized government, the national government who’s acted is advanced, great good, and sometimes, often it’s done the opposite. I’m somebody who believes in limited government and is wary of centralized government. I’m a lifelong conservative. That’s what’s shaped my beliefs in part because the way I understand conservatism is that it’s based very much on the human experience. It’s a negation of ideology, Russell Kirk and others have said. You have to take into account what works for the human condition. I’d say that there are several reasons for it in terms of why one is skeptical with centralized power. One is simply on the efficacy standpoint. Peter Schuck wrote a book about why government fails. He refers to himself in the book as a militant moderate.

He’s not an ideological person, but he’s an empirical look at what it is about a large government that doesn’t work very often, that fails where the efficiency is not what it ought to be. Anybody who’s worked there, if they’re honest, would concede that fact. How often these grand promises and hopes that are sincere and don’t translate into reality. I think you could look at much of the great society and see that. Even programs which have done some good but have also are themselves extremely inefficient like Medicare and Medicaid. I wouldn’t argue that no good comes out of them. I don’t think that’s sustainable, but those programs are not nearly as efficient as they could be.

TWS 14 | Dynamics Of Capitalism

Dynamics Of Capitalism: Most of life is acting in our self-interest provided that it doesn’t run over the rights of other people.

 

I’d say the inefficiency and lack of efficacy for centralized government is something that we need to be alert to. There’s the concern that the founders themselves had and many others who had, which is when you centralize power, there’s the danger of authoritarianism and even totalitarianism. That as the old maximum goes, power corrupts and absolute power corrupts. We’ve seen time after time that when people get a tremendous amount of power, when it’s unchecked and it’s on challenged, that can lead to some very bad conditions and situations. That was the worry of the founders. That’s the reason that they set up our system of government of checks, balances, and separation of powers because what they wanted was not an efficient government. They wanted a government that protected against tyranny.

I think that’s a second reason that people need to be wary about centralized government. The third reason is that if you go back and you read Adam Smith in a certain way and probably more specifically this idea about which is that there’s this mythology among Progressives, which is that if you get a group of wise men, wise women, they can oversee, conduct, and determine how human society can act and all realms that simply isn’t possible. They can’t do it. There are so many imponderables in lives, so many contingencies in life that the idea that a centralized state or a group of individuals would be able to make those judgments. I just don’t think works.

The fourth thing I’d say is George Will, a marvelous book that he wrote called The Conservative Sensibility writes about the American founding. He says, “That’s essentially what conservative’s need to conserve.” which is the idea of inalienable rights. Natural rights, rights that precede government. His argument and I think it’s a valid point that government, if it gets too large, too centralized, can undermine those natural rights. He makes the case in a pretty persuasive way that the belief in natural rights would tend to lead one toward a more limited government.

Let’s go to your book because you look at the idea of capitalism and just the word itself formulates a specific reaction in people as far as my experience is concerned. It’s not necessarily based on logic and thought through education debate where a person comes to an understanding. It’s more based on what has been heard. What society believes about that word? Talk about your best-selling book, Wealth and Justice: The Morality of Democratic Capitalism and weave that into the conversation. Talking about how that can essentially be a message that will hit on the principles that make capitalism good for society as opposed to what most people react to, which is that it exploits people and takes advantage of people. It’s all about the wealthy and them getting their own.

People are capable of virtue and nobility, but also acts of recklessness, irresponsibility, and evil. Click To Tweet

I coauthor it. It’s a monograph of the American Enterprise Institute with Arthur Brooks, who was for many years President of an American Enterprise Institute. He left to take a professorship at Harvard. Arthur is very good in a very sober and thoughtful voice on this thing. We wrote this book and the situation is more acute than it was when we wrote it. One of our concerns was Americans in general and particularly young Americans were losing faith in capitalism as a system. We see that in polls, and you’re probably more familiar with them than I am. The support for socialism is higher than at any time in my lifetime, probably higher than at any point since the early part of the twentieth century.

You see this in contemporary politics with the Democratic Party who are two of the hottest political figures in democratic politics, Bernie Sanders and Alexandria Ocasio-Cortez. They’re both self-proclaimed democratic socialists. If you watch the democratic debates, you see Bernie Sanders and Elizabeth Warren essentially taking an anti-private enterprise stance. There’s almost a reflexive hostility to anything having to do with capitalism or corporations. It doesn’t mean that those certain corporations don’t deserve criticism, but it’s a reflex. You’ve seen this rise in respect and to some of the enthusiasm for socialism and the decline in competence and capitalism. That’s a problem. Some of that is undoubtedly a result of the great in 2008. I think that the income gap between the most wealthy and the rest of the society probably had more of an effect on the general public than a lot of people on the right thought that it would.

It seems to have permeated society and the belief that the very rich are making out like bandits, the rest of us are not and so much of the gains in wealth, money from the market, that has happened. We’ve had wage stagnation from pretty much the entire part of the 21st century. Wages had been much flatter and it’s a complicated set of reasons for why that’s happened. I wouldn’t blame that on any single president. Certain deep trends are in play here, which I’m guessing you’ve covered. There seems to be a lack of faith in capitalism. That’s given rise to populism, which I’m wary about as a conservative. I think populism can often be antithetical to capitalism and it can be antithetical to reason itself.

I think it first goes to reason because I would say there’s less reason. It may be the delusion of information that’s all around us and individuals who can’t fit anything else into their head. Therefore they take the efficient approach and leverage the belief system of someone they feel is like them. It’s interesting to see how society has been wired to think a certain way and it’s not necessarily the beliefs associated with reason, debate and personal individual understanding. Its group thinking dictated by very persuasive people like your AOC and Bernie Sanders.

TWS 14 | Dynamics Of Capitalism

Dynamics Of Capitalism: It’s important for the defenders of capitalism and free-market to make those arguments and not to be dismissive toward the critics.

 

I think that’s right. There’s a rage at the system, the establishment of healing. It’s almost a quasi-nihilism. You see this toward capitalism and the politics in general, which is this idea that we have to burn down the village to save it. Things couldn’t be worse. Let’s just toss the whole thing aside. That’s what explains in part of the rise of Donald Trump. I’ve been a very strong and persistent critic of Donald Trump in large part on conservative grounds. What he tapped into is a sense that people wanted a wrecking ball to come in and shatter things. That’s deeply anti-conservative impulse, but he tapped into it effectively.

I’ve told friends of mine who were pro-capitalism and pro-free-market as I am. It is important to do a study or set of studies to understand what happened. What explains the loss of faith in capitalism, the rise in affinity for socialism. Both attitudes and specific episodes and incidents that explain it to understand in a thoughtful way what is driving it. What are the attitudes? What is associated with free-market and capitalism and to think through how do we tell the story? What’s the narrative? What’s the tale we have to tell to remind people why capitalism is a system that has brought so much human flourishing and then so much to encourage human dignity?

I think it was Orwell who said that the first duty of a responsible man is a restatement of the obvious. Sometimes you have to restate what’s obvious or what you thought was obvious. I’ve noticed this in life, in politics, and in economics and all sorts of realms, which is sometimes people forget to make the arguments in some fundamental way. Why is it that we believe what we believe? That’s understandable. You think that certain victories are one, that arguments are settled and you just act on that assumption. Sometimes without quite realizing it, the floor breaks and all of a sudden, that confidence that people had or that understanding those shared assumptions are gone.

I think when it comes to capitalism, it’s quite important for people who are defenders of capitalism and free-market to make those arguments. Not to be dismissive toward the critics, not to laugh at them, not to say these ideas are stupid. Therefore, it shouldn’t be repudiated. Don’t even engage in name-calling, just say socialist and hope that is enough. We have to do more fundamental work to make the case again, and in a sense to win the hearts of ordinary Americans. To explain to them why capitalism is an economic system worthy of their loyalty.

No matter how strong your argument is, it's never as strong as you think it is. Click To Tweet

Let me use some way to abstract of an example as you may use to. There is a documentary that I saw called Behind The Curve. It was essentially about this millions of people that came together stating that the world is flat. That documentary was done by a non-flat-earther. It was interesting because he took this approach and it’s a very irrational thought, but yet millions of people were gravitating toward this. It was all driven by this emotional desire that they have to fit in within a group. Usually, a group of people that don’t believe what everybody else believes. What’s fascinating to the point you just made is the individual who was doing the documentary, they interviewed astrophysicists. They were saying, “Do you know that there’s this group out there, millions of people that believe the earth is flat?”

It’s fascinating because it takes you through this psychological urge of what I think you’re speaking to because the astrophysicists in the end said that, “These people don’t know what we know, so we can’t assume that they do and make an argument from that standpoint.” You have to meet them where they’re at and why they’ve come to that conclusion. If you start to make them wrong or make them feel stupid, it’s just going to strengthen their argument. That fits within the confines of what you’ve been talking about.

That’s a very interesting observation. I’m intrigued. I like to see that documentary. That whole area does fascinate me, I must say. I don’t know if you’re familiar with the work of Jonathan Haidt, who is a marvelous moral psychologist. He used to be at the University of Virginia. He’s now at NYU. He wrote a book called The Righteous Mind. He spends a lot of time with a group called Heterodoxy, which is an effort to defend free speech on campuses against speech codes and so forth. Jonathan himself has been on an interesting journey and interesting pilgrimage. He started out as a traditional person who laughed at Progressive and is much more of a centrist. In part because of what his research has taught him. I’ve learned a lot. He’s a very intelligent, thoughtful guy and a very good guy as well.

His work on confirmation bias and motivated reasoning is outstanding. I’ve learned a lot from it and it goes to the point that you’re making. I think a lot of us believe that the positions others hold and that we hold are derived through some disinterested analysis of the facts, reasoning, and that reasoning has brought us to what we believe, free of emotion and all the rest. What we know about brain science and human nature, the more we’re looking into these things. It is so much of what we believe is a product of transrational or subrational forces. We have dispositions, tropisms, and predilections were products of our families of origin, our life experience, the people we’re around, and the communities we’re a part of.

TWS 14 | Dynamics Of Capitalism

Dynamics Of Capitalism: There is a chance to get some deeper understanding when people feel safe and when they feel heard.

 

That sense of fitting in with communities is extremely strong. We know from brain science that when you get information that confirms what you already believe, it’s a dopamine effect or rush. On the flip side, when there’s information that challenges certain basic assumptions, your brain puts up often a shield to block those things out. It’s genuinely uncomfortable for people to hear information that challenges them. I’d say in my own life, politics and just human relationships, that’s one area where I’ve changed. In the past when I would have differences with people, I would often write long emails, fact base, point-by-point. People who know me would think I was built to respond to some of these issues in terms of debating. Empirical evidence, premise facts to support it, conclusion.

What I’ve discovered is no matter how strong your argument is and it’s never as strong as you think it is. Let’s just assume for the sake of argument. You and I were having a debate. The case I presented against you was overwhelming by any objective standard. The odds are not only that, you wouldn’t change your position if I overwhelmed your case. You would probably, as you were indicating, dig your heels and more. It’s quite rare to shift people. I’ve seen this in theology, in the world of Christianity, in the world of politics and all sorts of world. Where there is a chance to get some deeper understanding is when people feel safe, when they feel heard. When they believe that you know their arguments and at least can state them and understand them even if you disagree with them. If there are a human connection and a human relationship, if you have in a sense standing in somebody else’s life and that will allow them to let you in and to make their case, and vice versa.

Alan Jacobs, who is a professor at Baylor used to be at Wheaton, wrote a book called How to Think. He refers to a foundation that when they conduct debates, the first thing that they require is that the people are debating. Person A states the position of person B in such a fair-minded way that person B believes that it is a fair restatement of their views and vice versa. That is the precondition before the debate goes on. If that thing happened more often, we’d get a lot further along. We know this from the social science evidence. We are as polarized as we have been since reconstruction. It’s a deeply polarized society and when that happens, people tend to go into their own camps and they shut off people who have alternative views. I think that’s happening in all realms, including in the realm that we’re talking about free-market and capitalism. That goes to the larger discussions we’re having, which is how do you make the case in a way that the people who could conceivably be open to an alternative case are.

You’re hitting on everything that has been going through my mind. What you said was brilliant. That’s where I look at just my experience and what I was trying to get to with the whole idea of central governance. People don’t like to be told what to do. There’s this fighting response to it that I think goes into what you were referring to as our unconscious or what’s built into our wiring. That right there includes a lot of when we had to survive where we don’t necessarily have to survive anymore, but yet those instincts are still there. When a person feels attacked, I would assume that it’s very similar to being attacked by the sabertooth tiger or some animal.

Human life and experience is about learning things and recalibrating new facts and conditions that arise and trying to adjust accordingly. Click To Tweet

That’s where I look at AOC and I look at Donald Trump in a way, especially where in a sense they understand psychology. They’re using what people will respond to as talking points and statements. People fall prey to it all the time. I look at the psychology side of things and going to where economics is and usually, the argument for capitalism tends to be rational thinking. I look at how human beings are wired. The majority of it’s emotional. That’s where I look at the values and principles approach has something that intrigues me as opposed to labels like capitalism, Democrats, Progressives or Liberals. It’s looking at principle as opposed to labels because the labels immediately there put you in that camp or excludes you. If you’re in the camp, you’re going to believe what the camp believes and if you’re excluded, you’re not going to believe it.

Labels exist for a reason because they label something. They identify world views, but I think that the labels by and large are probably counterproductive. Once the labels are cast out, then you’re putting people in categories, they’re putting you in categories. It becomes awfully neat, tidy and untrue. It doesn’t allow for flexibility and nuance, which is what human life and experience are about. You learn things, you refine your thinking, you recalibrate, new facts, new conditions arise and you try and adjust accordingly. If you’re in these ideological boxes, it’s very hard.

I’ve had these conversations with Trump supporters because I’m a lifelong conservative and I worked in three Republican administrations and in a Republican White House. I have a lot of friends who are Republicans. I’ve been so critical of Trump. They’re puzzled or upset by it. I’ve had a lot of conversations, many of them good. Sometimes it takes an effort to make sure that the relations don’t fray. It’s been helpful for me because I’ve been able to hear their perspective and understand where they’re coming from. I must say that there are times in which one makes an empirical claim as it relates to Donald Trump that is a criticism of him. Let’s say something about that he has lied and there’s demonstrable evidence that it’s a lie. It’s been fascinating to me how it just doesn’t breakthrough.

It is as if they think that that’s the thread and the whole thing can come apart. If they can see one thing that the whole project comes apart. I’ve experienced this throughout my life in politics, particularly when you’re in the White House. Many of the issues that you confront are complicated issues. They’re very intelligent people arguing different policies and different points of view. Often the decisions are 60/40 or 65/35. It’s not 100% arguments on one side and 0% on the other. That’s part of what discretion, judgment, prudence and wisdom is in governing. It’s the ability to hear these arguments which sound potentially equally persuasive thinking through we choose the one that is most appropriate given the circumstances we’re in. What are the contingencies that we have to anticipate but are unknowable? If you’re deciding a set of policies that you want to roll out, what’s achievable politically and not? What’s the composition of Congress? You might want to push some elements of privatization of Social Security, which you could believe is the right thing to do, but maybe it’s not achievable.

TWS 14 | Dynamics Of Capitalism

The Death of Politics: How to Heal Our Frayed Republic After Trump

Maybe you have to do something ahead of that. These are all very complicated issues to take into account. Often they are choosing one set of policies over and against another one or 60/40, but then when you get into the actual discussion, those differences disappear and that weighing of pros and cons disappears. It’s as if all the arguments are on one side and not on the other. Once you settled on a position, there seems to be some reflex that we have that says, “I can’t concede a single point to the other side because if I do it, I weaken my case and I can’t possibly weaken my case.” You have people shouting, talking points at each other, talking past each other, and refusing to engage each other and saying, “That’s a valid point. I think you’re right. I just think that the other arguments on my side outweigh the good point that you’re making.” It’s all very complicated and very challenging stuff, but I think in part explains why our politics is as broken as it is.

For the readers, I love having these conversations. Hopefully, this is valuable to you. Some of the things you’re saying, it comes down to this relation to human connection. I think all people want to connect. They want to have a relationship. At the same time, there’s this instinctive protection that they have where they want to look bad. They don’t want to be wrong because what that does is it invalidates their identity to an extent, but when you break down those walls, it’s amazing what can happen. People, either value is a value or a principle is a principle or it’s not. Most people would concede to capitalistic principles if it wasn’t labeled capitalistic principles. These are principles of life in a sense. I’ll end with this and I’ll let you have the final word. There’s something I’ve thought about, which was interesting to me.

I have little kids, two teenagers and a five-year-old. We went to the Disney Aulani Resort on Oahu. When I was there, there’s this central pool section. There were these two guys that had these big earrings, big guys with these tattoos on their arms, hardcore guys. I was able to have a conversation with them. They were there with their kids. We were in this environment in which the walls were broken down and you can have that connection, yet if I went to their neighborhood and was walking down the street at night, the environment changes, walls are up and the outcome is not going to be the same. Human beings are wired in a certain way and we want certain things. They’re very similar yet because of these walls that come up and are reinforced, it’s difficult to have the connection that’s needed in order to make even more progress.

That’s a very interesting story and I think it touches on these deeper truths that we’re talking about. An awful lot of this is what you described, which is a sense of identity. That’s basic to human beings, feeling of belonging, and feeling of community. It’s pretty rare to find people who will take stands that will put them at odds with the community that’s most important to them. That explains a lot of the political tribalism, but we’ve got to find a way to try and break down these walls you’re describing. There’s some lovely verse in the New Testament about breaking down the dividing walls that exist between people. When those walls are up, it usually means that life is going to be harsher, less sympathy, more anger, more antipathy. People begin to view other folks not as individuals that you disagree with, but as enemies at the state, enemies of your cause.

We need other people with other experiences to help us see and to understand. Click To Tweet

What can quickly kick in is the dehumanization, which is if you see things differently than I am. It’s not because you’ve analyzed things wrongly and you made an intellectual error, but you’re morally defective. There must be something wrong with you. If you don’t see things the same way I do, then you don’t value the same things that I do. In fact, you’re a threat to them. We see that in contemporary politics. We know from the data that the attitudes that Republicans, Democrats, Progressives and Conservatives have toward each other. It’s much more personal than ever before. There’s a feeling that these are not just differences of policy, but they are character flaws and faults. If you feel like you’re being attacked on that fundamental level, you’re an alien, a malicious force, a malignant force, that you want to hurt me and you want to hurt everything that I know and love. When that happens, a lot of bad stuff kicks in and we’ve got to break through that. We have to deepen the understanding and sympathy that we have for one another.

In the book that I wrote, The Death of Politics: How to Heal Our Frayed Republic After Trump. I tell a story in one of the chapters about CS Lewis and Owen Barfield. CS Lewis was a great medievalist and scholar in England. He was probably the most important Christian apologist of the twentieth century. He started a literary group in England in the 1930s. He and JRR Tolkien were the mainstays of that, but there was a person named Owen Barfield who was a British philosopher and poet and somebody that Lewis knew for many years. Lewis in his book Surprised by Joy describes what he refers to as first friends and second friends. For him, it was a person named Arthur Greeves, somebody who knew since his childhood. He said, “First friends are the individuals that when you start the sentence, they’re able to complete it. They’re your alter ego. They see the world largely the same way that you do process it the same way.” We all need that. That’s part of what human community, human attachment, human relationships bring to us. Lewis described what he referred to as a second friend and that was on Barfield. He said, “The second friend is the person who’s not your alter ego, but your anti-self.”

That’s the person who describes who reads all the same books you do and draws all the wrong conclusions from those books. He has a section where he talks about these debates that he had with Barfield and they were pretty intense. They were esoteric debates, but they were about the role of imagination and reason. Lewis says that he and Barfield would go at it hammer and tong late into the night learning the power of each other’s punches almost unconsciously beginning to absorb what the other person was saying. Out of this dog fight, a community of affection grew. The punch line was that Lewis and Barfield both treasured their relationship precisely because they took all the world somewhat differently than the other. They felt that their aperture of understanding was grayer because they had each other in their life.

Barfield later said that, “When Lewis and I debated, we didn’t debate for victory, we debated for truth.” That’s just an entirely different way of approaching dialogue and conversation, which is, “Do you have something to say where I can learn?” “Can I come out of this conversation knowing something that I didn’t before? Knowing something about you, something about the nature of the world, something about the experience that helps me see things better than I would have?” That goes back to what we were talking about, which is epistemological modesty. Even if in some abstract sense you or I were 100% correct in our understanding of a particular issue, there’s still no way that we could know the full truth and reality of things on any number of issues. That’s not within our capacity. That’s why we need other people with other experiences to help us see and to understand. If we were able to take that to heart and to incorporate it in our lives and embrace it, a lot of things in life would be better than they are.

I’ll say something to that. There’s a concept and idea that I love to use, which is three sides of a coin. Most people look at coins with two sides. There’s the edge, which is the third side. The concept is heads is one opinion, tales is another opinion, but then your opinion should sit on the edge where you should evaluate. Where are the arguments? Where the perspectives are coming from and then rationally come up with your own. I tried to look at that because you’re hitting the nail on the head with a lot of stuff we’ve talked about when it comes to perspective, what truth is, how people come to truths, and then how people change and essentially go from one side of the spectrum to another. Everything you’re hitting on is fascinating. I’d love for our audience to learn about you. Would you mind talking about your book and where they can pick that up? Also, how they can follow you. I know you are contributing to The Atlantic as well as The New York Times. Maybe talk about those outlets so that the audience can follow you.

The book that I just wrote, which was published by Harper Collins is called The Death of Politics: How to Heal Our Frayed Republic After Trump. It’s an account of my life in politics. What I’ve learned, why I believe politics is important. I think it’s a low moment and a dangerous moment, but I make the case that we need to do something about it because justice matters, and politics, it’s about a lot of things. It’s got its dark undersides as all professions do. It’s finally and fundamentally about justice. The book I wrote in less than a year, but it’s the product of a lifetime in politics. People can get that on Amazon, Barnes & Noble or any of the other outlets. I’m a contributing editor for The Atlantic Magazine. I’m a contributing opinion writer for The New York Times. I’m a Senior Fellow at the Ethics and Public Policy Center. People can follow my work there. I’m on Twitter @Peter_Wehner. I write about all sorts of issues. I’ve written about capitalism, politics, faith and friendship, and then from time-to-time, I interview people for The Atlantic. I did a couple of interviews with David Brooks on his book, The Second Mountain, and then with George Will and his book, The Conservative Sensibility. For me, it’s a lovely way to earn a living, which is for me to write, think, talk to intelligent people, and try and learn along the way.

Peter, it’s been such a joy to speak with you. This has been an awesome conversation for me and I’m hoping readers got as much out of it. Thank you again for your time. Thank you for the good that you’re doing. We’ll have to connect in the future sometime.

I’d like to do it. I enjoyed the conversation a lot. Thanks. Take care.

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About Peter Wehner

TWS 14 | Dynamics Of CapitalismPeter Wehner is the author of The Death of Politics. He is a New York Times contributing Op-Ed writer covering American politics and conservative thought and a popular media commentator on politics.

Wehner is also a Senior Fellow at the Ethics and Public Policy Center and veteran of three White House administrations.

 

 

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Looking At The Markets, The Political Arena, And The World Economy with Dr. David Collum

TWS 13 | Economy

 

Let us talk about the free market as we dive into the insights of Dr. David Collum about the economy, our society, and our future. He is a Betty R. Miller Professor of Chemistry at Cornell University and is a regular and valued presence on the internet commenting on the financial system and the predicaments of our time. Dr. Collum gets philosophical and shares the paradigm and perspective he is using now to look at the markets, the political arena, and the world economy as a whole. Looking into our current situation, Dr. Collum shows how the economy has become about moving money and not goods and services, sharing better ways to distribute.

Watch the episode here:

Listen to the podcast here:

Looking At The Markets, The Political Arena, And The World Economy with Dr. David Collum

I have an interesting guest. We’re going to get into his story and what he does for living as well as something that I became intrigued with. His name is David Collum. He’s a professor at Cornell University. However, he writes a yearly economic review and has done for the last several years. You can find it on PeakProsperity.com, Chris Martenson’s and Adam Taggart’s blog. I’m excited to dive into his insight into the economy, into our society and what he sees as our future. David, welcome to the podcast.

I’m glad to be on.

I did a ton of research into what you wrote about in 2018. I happened to be going to a financial conference up in Whistler right after Ray Dalio was speaking, Howard Marks was speaking and there are a number of others. It helped me have a more refined perspective on what occurred in 2018. What I want to do is dive in briefly to your story because your economic review of things and your formal profession are a little bit different. Would you maybe explain how you came to start writing this annual review?

I didn’t pay any attention whatsoever to the stuff. I did chemistry. Around 1995, I started to pay some attention, some natural things start to develop some savings and you realize that it’s starting to matter. My dad and I used to chat about it when I was a kid. It was natural. As a raging bull for a while after that. In the late ‘90s, I started to notice that things are out of whack. In a fateful moment in July of ‘98, I decided to think for totally out of whack and I dumped half of my equities in cash. Almost to the day we went into that Asian crisis, I feel like I’m a half genius, half idiot. Down in the basement, I said, “If this comes back, I’m dumping the rest.” We came back and by mid ‘99 I had exited equities. There’s some phenomenon where once you go bearish, it’s hard to go on bearish again. Bulls get taught lessons much more dramatically than bears. By ‘99 I dumped all the equities right down to the last share and I was buying gold. I wouldn’t tell anyone though. It was embarrassing to buy gold.

Finally, I fessed up to a couple of people and they go, “Gold?” I said, “Yeah.” That paid off well over the next several years. It took a couple of years to not feel like an idiot though. I read more and more. I was at this chat board run by a guy named Doug Noland. We would chat and I wrote some stuff up at the end of the year and said, “Here’s how my year went and here’s what I’m thinking about.” One day I went viral. I left the containment field. I went from 200 clicks because that’s how many of us were there to quite a few thousand. It turns out one of the guys, named Jessie’s Café Américain, he had started the blog and he put it there. The next year I wrote it again and it got bigger. It was in 2008 or 2009, I decided to get serious. It was my 30th year of investing so I called it 30 Years of Investing from the Cheap Seats.

I laid it all out and all of a sudden, I started getting emails from people around the globe. The most shocking of which was the one I got from Iron Horn and he said, “This got passed to me,” and made some comments. From there, every year got bigger and broader. It had a natural growth rate to it. In 2018, it was about 160 pages. It’s hard to write 160 pages, but it’s hard to do it at the end of the year. I go into some lizard brain to do it. It goes to Zero Hedge, which spreads it around the globe. I’ll take on anything that catches my eye. If an antique catches my eye, I’ll write about antiques. If college finance catches my eye, I’ll write about it. There’s always a section on bonds, valuation and stuff like that.

I don’t necessarily count it by the pages because I’m reading it on a browser. I counted by how skinny that little icon is that you have to drag down. It’s quite a bit of work. Let me dive into a few things that you said. The first is you started to see things differently in the late ‘90s, which gave you a certain perspective. You acted on it. Maybe talk about where that philosophical base came from and maybe how it’s evolved into what that paradigm or perspective is you’re using to look at markets, look at the political arena and look at the world economy as a whole. Maybe you can go through that if you would.

I’m not a trader. I go into a position I usually average in slowly. It can take years. I probably make a trade a year even sometimes. I’m 100% about valuations. What happened to me in ‘98 is I concluded the valuations were at a point where historically win from that point. That’s still true to this day. Of all the cycles I’ve been through, I was in all bonds starting in 1980. People would say, “That was stupid.” I go, “I was making about 15%. It wasn’t that stupid.” When the crash in ’87 occurred, I was reading about it. I was not paying attention, but I realized I should be in equities. After the ‘87 crash, I moved into equities. I moved out again in ’99. I moved into gold, a lot of cash. I had a short position, which is a trade thing for me to do. I’ve done it twice. I will probably never do that again. It worked both times, but I know better now.

Winning doesn’t mean you’re not an idiot. I don’t blame myself. Every decision I make goes through the filter of it doesn’t work, will you forgive yourself? I started buying in ‘09 but I failed to buy not out of fear but out of greed. I started buying it. What a lot of people don’t know is we got down to approximately historical fair value in ’09. They think we are in some basement somewhere. We were nowhere near a basement. I document that exhaustedly especially in ‘18. I was positive that we would have to blow out a lot more. I remember Doug Cliggot saying, “I’ll be buying at this level and then it’ll drop. I will be bullish and at this level I wish I had saved my money.” That was the mode I was in.

When it jumped away from me I said, “This is 1931. We’re going back down again.” Nobody saw the levels of intervention coming. I know hundreds of people saw the mortgage crisis, hundreds and hundreds personally. I can’t find a single person that can point me to a single article where they said before this is over there will be trillions of dollars inserted into this. I can’t find that article anywhere. I failed to catch this road rage created by central banks. I’ve been largely not catching it. I was trading a lot of water and gold and I’m waiting for the next downswing. If my worldview is correct, it’s going to be a nasty one because they’ve blown up a gigantic bubble in both bonds and stocks. When those two start to blow up, I don’t want to be in the splash zone.

You had this perspective of things in ‘09 and then you saw the initial intervention mostly and then it gravitated to QE, how markets would respond short-term and the long-term.

The corporate buyback isn't capitalism. It presupposes that every other aspect of the economy is free market, which is not. Click To Tweet

First and foremost, I joined the club that turned out to be big and wrong that inflation would take hold. It hasn’t. There are people who say it’s there, but it’s not of the magnitude we thought and gold coming out of that bottom. It wasn’t in 2000. If I remember ‘13 where gold started paying dearly for not being right and that’s the thing I blew. I didn’t listen enough. I was like Lacy Hunt, Mike Shedlock, they were deflationists. I bought the bankers line that determined central banker can create inflation. Hunt and Shedlock are the two that I happen to remember well saying, “We are going to have deflation.” It didn’t sit with me and I think they’re correct.

It’s one of those things in hindsight. Everything makes sense as to this move and what it caused. I was looking at foresight when the move is taking place and seeing what impact it’s going to have. Sometimes it’s impossible because it could go a number of different directions. That was ‘09 and the world has changed quite a bit. How has your perspective changed in regard to your philosophy? Valuations no longer make much sense at all. You’ve had a lot of creative corporate finance going on which has continued to grow certain sectors. Ultimately, there are signs that there could be a correction. There are also signs that there might not, but maybe talk through what your experiences have been since 2009 and how your philosophy and perspective have been refined.

It hasn’t changed too much in the sense that of all the bubbles, this one is the one that seems most nonsensical to me. Every previous bubble, there was a good plot line, there was a good story. Whether it was 1929, 1999 or the 1960s where you can always say, “Here’s this revolutionary moment in history and things are rocking and this is why it’s exciting.” Even the South Sea Bubble, they all have a story. The story of this particular bubble is the Fed won’t let us down. That’s a stupid story because they’re incompetent most of the time. They are able to be competent in the short-term, but not able to stop the tides in the long-term and be a cause of a lot of pain when they don’t. I severely blame the Fed for ’09. They’re at ground zero for ‘09. It wasn’t crazy consumers. It was monetary policy.

How do you address those that are like, “The world would have gone to crap and were crumbled if the Fed didn’t intervene?” I hear that quite a bit.

I can live with that idea as long as those people acknowledge that aid has caused it. This is like Ted Bundy is killing people. The second thing I would want them to acknowledge before we would be on the same page is if they’ve been excessive since ‘09. It went off the cliff during Yellen’s term as Fed Chair. She had opportunities to start getting things back to normal and she failed. All excessive QE’s, it’s possible they can see disasters. They’re afraid of it. We now have a Fed who’s afraid of deflation, afraid of a recession. The Fed used to be the root cause of recessions and now they’re trying to avoid them at all costs. When the next one comes, it’s going to be bleak. We’ll have massive corporate debt. I can’t even fathom. Pension funds are underfunded at the top of a bubble. How do you get an underfunded pension when they’re all underfunded? The next brutal correction’s going to send them far into the basement that they’re going to break. They’re going to break right on schedule for the Boomers trying to retire. It’s going to be unpleasant. If the next recession comes and goes and it was garden variety, it’s wrong. I don’t know what to say, but we’re going to be in fetal position on the next one.                                    

I’ve dedicated this season to the theme of capitalism. When you look at free market capitalism and what that philosophy entails and the principles, I would say a lot of economists have understood it for a while and then what it has become. Looking at how that word is used nowadays, there has never been a truly free market, capitalistic system. That’s where you have intervention particularly by central banks and how that does not allow for certain elements of capitalism, mainly failure to occur. It essentially creates unintended consequences and now it’s been creating unintended consequences for the better part of 100 years. If you look at where we’re at, I would say fundamentally when you look at a free market, we would have crashed. Banks would have been out of business. A lot of other businesses would have folded, but that would have been given rise to a more efficient monetary system potentially. We can’t know. It’s all speculation.

You look now at what you mentioned, the fundamentals there when you start to manipulate behavior, you’re essentially deferring the problem to the future. Who knows what that’s going to be? I look at some of the same concerns that you have, the unintended consequences are monstrous. Maybe talk about a few of the big ones. You mentioned pensions. You mentioned the corporate bond market which is massive. Maybe get into those few points which you talk about extensively in your review. Maybe talk about those couple of those main unintended consequences that a lot of this monetary theory has created.

I went completely back to the law on valuations. I presented approximately twenty different metrics of market valuations. They all point to the same story. That is regression to historical mean won’t be a 50% correction. I believe this time at 50% correction, things will break. I don’t know what. These are chaotic systems that you can’t predict. You can predict it, but it will be a mess though. What we have is the appearance of politics getting into the game. At least some of your readers have been paying attention to this modern monetary theory. I’ve tried to get my brain around it. It looks like total nonsense to me. In theory, it’s fine. In practice, it looks like a disaster. It emerged in the context of a budget deficit that’s running 7% or 8% a year. We know in the GDP is running at 2.5% over several years and the budget deficit is running at 7% or 8% that you’re in a death spiral unless you turn it around. The market trends 300% while the GDP ran 30% to the extent everyone I know thinks over time they track. That’s not a good situation. That’s the famous Buffett indicator.

What we’re going to see in the 2020 election, politicians always promise free stuff, but you will be breathless with the level of free stuff being offered in 2020. Goofballs like AOC, Alexandra Ocasio-Cortez pulling the Democrats so far left that they’re socialists. I would never have thought there’d be people who were devout socialists in competency for high office. The rallying cry for the Democrats is going to be, “Wall Street got theirs in ‘09. It’s time for us to get ours.” That is going to be a catastrophic spark to cause problems that are almost unimaginable. I don’t know how to go there. If readers are interested, search justice Democrats. Go on an online search. You’ll find out there’s a coup going on within the Democratic Party and its real. I’ve seen videos of Ocasio-Cortez talking about how she got put into power and stuff like that. It’s a strange thing, the new guard of super liberals, super left wings. They are not trying to beat the Republicans. They’re trying to beat the Democrats. There’s a whole bunch of them. This is the real stuff. I wouldn’t have believed it but the first time I saw a presentation of it, there were videos attached showing people talking about it from the past.

What’s happening is there’s a powerful group who’s attempting to find Democrats in districts for which Republicans will never win. There are plenty of those which the people in the district are not happy with their representatives. They’re trying to knock the Democrats out at the primary. Ocasio-Cortez, AOC, is the de facto spokesperson for the Democratic Party. She’s got the microphone. It’s open mic night. She got elected with 15,000 votes in the primary. That’s where she got elected in the primary because she wasn’t going to lose the election. She’s going to lose the primary if she could. This Omar woman, I can’t remember her whole name. There’s about four for these freshman Democrats. This is the surreal part that people have to do a little deep diving. They were recruited by a casting call. They literally put out a call, Ocasio-Cortez said her brothers submitted her name and somehow it’s like they’re putting together a boy band or something. They’re putting together the Bangles and the plan is to start knocking off Democrats. I was wondering why Ocasio-Cortez was hammering the Democrats. She’s done some talks about that because she’s not against the Republicans. She is against the Democrats. This political move has massive implications for free-market economics.

It’s the first that I’ve heard of some of the points that you’re talking about. I look at what has essentially been a huge influx of capital, which I would say created the big bull run from ‘09 until even late 2018. It makes sense that you have a lot of economists at the helm there. You have Wall Street, which for better or for worse, they know how to manage money, they know how to make money and they understand the implications of losing money. You’re essentially saying that now, the influx isn’t going to go into the hands of Wall Street. It’s going to go into the hands of those that don’t understand even the fundamentals of things.

TWS 13 | Economy

Economy: When you start to manipulate behavior, you’re essentially just deferring the problem to the future.

 

My tax guy told me I’m going to pay 10,000 more in taxes this year because of the new tax laws. I didn’t see this coming. Maybe I’m unique. I’ve got an expensive house, got big real estate. If that’s true, April 15th is not going to deliver checks to people. All of a sudden there’s going to be a completely unexpected slowdown. That’s not going to help. We mentioned that all the time, student debt’s destroying a generation. Corporate debt’s nuts, corporate debt’s in a massive bubble. If you start toppling corporate debt structures, that goes straight to the economy.

One of the stats in your report that surprised me was the majority of the Russell 2000 was in junk status.

Something like 50% of the debt. It’s even worse then. 50% of the debt in the S&P is right above junk. When you swept the junk, you set up triggers all over the credit markets because there’s plenty of holders that did by statute, by legality which can’t hold junk. Electric’s a piece of garbage. It’s gone around the drain. Deutsche Bank’s going around the drain. There are a lot of companies that are not bringing enough revenue to pay their debt service.

Everything in essence intertwined and connected even other countries. Whatever is going to be that trigger that starts to release the dominos, who knows? Pensions are catastrophic because of the interest that they’re using as part of their actuarial models, which are not realistic. You add the unfunded liabilities. It’s been surprising to me because we’re in Salt Lake. Goldman Sachs’ biggest office in the world is in Salt Lake. You also have a relatively high percentage of startups getting to certain capitalization levels, but they don’t make any money. They operate based on being able to receive different rounds of funding. You look at how business is being created these days. We have to operate on a profit and I have had developers poached for 40%, 50% more than I was paying them.

I can’t afford that because other companies get funding. They bid up the prices of labor. You see signals everywhere. I tended to be in your camp back in ’09 or 2010. I didn’t see what was coming. I look at, “Is there something else on the horizon that we don’t see coming?” It’s the technological innovations that could potentially impact efficiencies and prices in a deflationary manner. I look at what you’ve gone through and that’s why the 160 pages is incredible research. It’s not stating just talking points, but also the actual proof behind it. I definitely recommend anyone who’s reading this who has some level of insight to check out David’s 2018 report definitely. Looking at these concerns that you brought to the table, I haven’t necessarily looked at the impact of Justice Democrats.

Justice Democrats are political. You’ll find articles about this movement. Who knows what they’ll do? That’s why these risks have appeared, but something like 65% of the population is signing off on the ideas of socialism. Back in the ‘20s and ‘30s, society had got through this unbelievable industrial revolution. Society was trying to figure out how an industrial world should be organized. There were central planner types. These were the guys who were at risk of being called Trotsky types. At the time, it was a credible idea that you needed good central control of things in this world that we had entered. There are the free market guys who said, “No, free market capitalism is the way to go.”

One can make the argument that that FDR was about a big compromise where the free market guys basically said, “Let us do our thing and we’ll put safety nets underneath you.” You’d get welfare state beginning. It’s the reason why society does protect weak people at some level. The welfare may be viewed as pejorative, but it gets out of control. It’s not a bad idea. We’re entering a period where we’re going to be looking ahead to a new grand compromise because somehow capitalism hasn’t done itself a service. I’ve been fighting about share buybacks and how corrosive they are and stuff like that. I’ve concluded people don’t even understand what they do and don’t do. The most fundamental level of what a share buyback is, people don’t understand.

Share buyback was illegal, but Glass-Steagall came into place after the Great Depression. It’s down as well. What I’ve discovered in the months I’ve been doing this theme is we’ve never had capitalism. There are capitalistic ideas and principles, but there’s never been a system because the corporate buyback isn’t capitalism. It might be, but at the same time, it should presuppose that every other aspect of the economy is a free market, which is not. Interest rates were manipulated which allowed for the corporate world to capitalize on low-interest rates and finance buybacks. It doesn’t necessarily create productivity in the company. It keeps their valuations at the same level or higher.

One of the ways to look at it is if you have an economy that’s based on goods and services, then all boats rise. This is an economy that develops new ways to do things and people’s boats rise at different rates, but all boats rise. We brought prosperity to ourselves by being fairly free market-oriented. The monetary policy has turned our economy from one of providing goods and services to one of moving money. We turn on CNBC, you don’t hear about capitalism; you hear about finance. As the economy morphs from goods and services to finance, you morph to a zero-sum game economy because no one’s making any. You say, “Yes sir.” What are the biggies? Is Netflix the replacement for US Steel? Is Amazon even the replacement for Standard Oil? Is General Electric being replaced by Facebook? These are stupid ideas.

Now, as the economy becomes about moving money, not goods and services, the little guy’s getting killed. That’s the wealth inequality problem. We will solve the problem not by finding better ways to distribute wealth, we’re going to solve it. I’m not saying it’s a solution is what we’re going to do. We’re going to try to redistribute wealth and redistributing wealth doesn’t work well. An efficient economy has a way of distributing wealth such that it’s fair. It’s not necessarily benign, but it’s fair. The workers get their share. They’re not as skilled as maybe then the upper guys who spent years in college and doing smart things, but they get their share. By pricing capital cheaply, they basically priced labor out of the equation.

Now, it’s cheaper for McDonald’s to get robots than to hire people. I am a little worried that change is always good. People worried about what we are going to do with a buggy whip maker, with cars. They’ll find a way. We’ll figure that out. Change can also be quick that it causes problems. If you add hot water to an ice cube, it cracks. If you’ll let it warm, it slowly melts. Things adjust. If you get too far from equilibrium, you get avalanches, earthquakes and explosions. These are big displacements from equilibrium who are turning the equilibrium.

We brought prosperity to ourselves by being fairly free-market oriented. Click To Tweet

What’s the central mechanism for that balance? What should it be?

First and foremost, the missed opportunity is for the Fed to quit worrying about recessions and let the downturns go. Let the downturns keep shaking out the losers and leaving room for the winners. When I was a kid, my dad was a contractor. He worked in one area and he went into cement pumping. It was this big monster truck that pumped up seven floors. I said, “Why did you go into cement pumping?” He said, “You mean besides I can make money?” I said, “Why that one?” This must have been 1970 or something. He said, “It’s because the truck costs $350,000,” which back then was a pot of money. He says, “I can compete with any other contractor who has the capital to buy that truck. We can both be on the playing fields at the same time.” He says, “What I can’t compete with are wildcatters who come in, undercut my prices and put us both out of business simultaneously.” Making capital precious keeps the meatballs out of the game. It keeps shaking out the losers and keeps the winners. It keeps the honest businessmen, the efficient businessmen in the game. Right now, we’ve got all these businesses that would not exist if we weren’t giving them credit and that is a problem.

That’s also what they consider as the solution where a lot of these technologies are ultimately to make life cheaper, make life better, make life more efficient and solve the world’s electricity issues and food issues. It’s both sides of the argument. What I’m saying is what’s in the middle balancing it all out? Like you said about water, if you go too cold, something happens. If you go too warm, something happens. Who is there dialing the temperature?

It’s the rate of change. Every once in a while, you have a small earthquake. You never get them anymore. If you go for 100 years in California without a serious earthquake, you’re about to get your rear kicked. This is where I blamed the Fed. They kept trying to avoid the corrective measures that would have kept it from getting too far from equilibrium. You asked me how I got into this. The field I’m in chemistry turns out to be complicated. Few people want to go near it. I was told that I couldn’t get funded and things like that. All sorts of contrarian things drove me into this field. What I discovered is absolutely everything that people thought they knew it was wrong, almost to the letter was wrong. We’ve gone through many projects after projects. Not only were the answers to the questions wrong, but the questions themselves were also wrong.

For 35 years, this has been my life. What it has taught me is experts can be dead wrong. I have a few superpowers, none of which you’d normally think of me. I’m not that smart. I have the ability to figure out what I don’t have to do and not doing it. That’s a superpower. The other thing I have the ability to do is to look at a bunch of experts who all tell me something and say, you’re full of crap. Few people have arrogance or the ability to resist the tractor beam, but I can look at a dozen central bankers who say, “This is what we should do,” and I go, “I don’t think so.” That’s a special crazy. I’m supposed to debate one of the vice presidents of one of the federal reserves. That’s a special crazy. It’s scheduled now I’m told on a podcast.

Is it one of the board members?

It’s a guy in St. Louis and it’ll be on Twitter, I guarantee you. It probably will be less than a debate. We’re going to talk about modern monetary theory. He invited himself to my podcast, curiously enough. He chimed in and said, “What about both of us?” At first, I don’t think he knew who he was. I said, “He’s the vice president; you got to say yes to this one.” We’re going to get on and discuss it. He entertains the idea of the modern monetary theory, which in practice is preposterous. I can explain it in theory, but I can’t explain it in practice. He’s an open-minded guy. I don’t think we’re going to clash. I also know that I can’t let it clash because it’s not fair to him. I could say, “Why did you instead do this?” In public he can’t respond to certain questions. I can say, “Isn’t Greenspan an idiot?” What is he going to say? I am going to have to be aware of the fact that I have to approach this differently.

Going back to like my original question, now I know we’re a lot of your philosophy has come from. You have stated theories. Human beings all have that element of fallibility where we form certain opinions, but it’s based on certain amounts of information, but not all information. I don’t know if anyone has all information, but you look at the world in that capacity and you realize that there’s a tremendous amount of trust for people that are considered so-called experts. You put yourself in a political role. You put yourself as part of the Federal Reserve. Suddenly the layers of power create this God-like mentality, but it also creates this incredible fear of being wrong.

That’s where a lot of the issues start because there could be positive results because of current monetary theory and what they’re trying to do. At the same time, they never addressed the consequences and there’s always going to be consequences. I can’t wait for that debate, but what a platform to try to have a discussion with an insider at the Federal Reserve on MMT, which is excellent. At the same time, it’s a modern monetary theory. Calling the question does monetary theory in general and what it does because right now it doesn’t make sense. Maybe you can explain this briefly, but from what I understand, the difference is it’s a creation of money that’s not monetized. There’s no underlying asset. If the Fed prints money, they buy a mortgage or they buy a bond or they buy a treasury. They buy something. This buys nothing.

The modern monetary theory has one of the premises that deficits don’t matter.

There is no debt. You’re never going to have debt. You could print your way out of a deficit.

TWS 13 | Economy

Economy: At the time, it was a credible idea that you needed good central control of things in this world that we had entered. Then there’s the free market guys who said free market capitalism is the way to go.

 

We talked about this many years ago. It is actually about 100 years old. We said, “In theory, the government doesn’t have to tax us at all. They can spend the money created with help from the Central Bank.” What happens is the cost of government shows up as inflation and it erodes your spending power as a tax. There are a lot of problems with this, one of which is that inflation is called a hidden tax. I want the taxes to be in plain sight, so we understand what it is we’re being taxed. The real problem is they make this assertion that taxes are to control the money supply. The claim they make is you spend the money and then you tax to pull that money back. It becomes a chicken and the egg if you’re not careful. Some say, “We’re already doing this, why do you care?” It is also this dismissal of government spending is rampant in that community.

Their idea to curb inflation is up to Congress to curb spending. When was the last time you saw them do that? That in practice goes nuts. When was the last time a guy stood up and said, “We’re going to have an inflation problem? As your senator, I’m proposing a bill that will cut jobs.” That’s not going to happen. It’s a stupid idea. Once in a while, they say something stupendously stupid. For a while it can sound rational. All of sudden they say something that’s mind-bogglingly stupid. I go, “You guys are making it up now.” It’s getting a lot of negative press. In theory, the tax against Larry Summers and Frogman even of all people are fighting it. They’ve shown up at the moment when our deficits look unsustainable. Along comes this theory that’s 100 years old that says, “Deficits don’t matter. Don’t worry about it.”

It’s not a coincidence. This has been fascinating. I wanted to see what your insight is and your philosophy around how you view you view things. Hopefully, the audience got something out of it. In the past, we’ve talked extensively about a lot of the issues we’ve briefly touched on. These are issues that are results. Those results have a cause. The cause is where to start, not trying to change the results by themselves. I look at what the Federal Reserve has done since 1913 and what’s happened since then. You can see a lot of positive things, but also from a fundamental standpoint, you can see a lot of negative things. We’re at unprecedented levels when it comes to the signals of our markets and the levels we’re at whether it’s a debt or otherwise. It’s scary at the same time. It’s always that question in the back of my mind, “What am I not seeing? What do I don’t know that I don’t know?” That’s always been that X variable that’s part of the equation that few people can ever understand until it happens.

When Powell showed up, people who thought they knew Powell as chairman of the FOMC. People said he’s different. He doesn’t care about the markets. He’ll do what’s right and the markets are damned. If they have to correct, they have to correct. Two events occurred that were mind-boggling to the point that those who are likeminded were breathless. It was December 24th when the markets had corrected 16% after a 300% run. They corrected 16% and all of a sudden secretary of the Treasury Mnuchin who’s most famous for his wife. The president’s working group on capital and we go, “That’s not even a blip? What are we doing?”

It’s possible something was going on in the credit markets under the surface. I picked up little murmurs about that. In January, Powell found himself on stage with Yellen and Bernanke. The huge mistake he made was to be on that stage because you do not speak as the Fed jury. You don’t speak extemporaneously onstage. He monitored the idea that the Fed was ready to support the markets. All of a sudden, that was the birth of the Fed, what they call it. The idea the Fed will not let the markets drop. Those two events created this massive January rally that we’ve witnessed. What it did is it showed a lot of serious players that the Fed is weak.

They capitulate. I heard the same thing as far as Powell is concerned but imagine the pressure he’s under. That’s where everybody caves at a certain degree of pressure?

Imagine if the generals in World War II couldn’t imagine dropping guys on Omaha beach. How would that work? If you’re in that position, you can’t be weak. If you can’t make the tough calls, you don’t get to be there, but he is there. He blew it and he looks real. He did a 60 Minutes episode.

I didn’t know he was the one with Yellen and Bernanke. I knew about the 60 Minutes one.

He wasn’t explicitly lying, but it was a massive dose of it. It was a massive dose of highly-engineered statements. When they asked him about wealth inequality, whichever one I know says, “You got the point at the Fed on that.” That’s the whole financing the economy in spades. When they mentioned that to him, he said, “That’s not under our jurisdiction,” which is technically not a lie, but he caused it.

That’s a big thing. That’s one thing that’s scary. At the top levels, there’s little velocity. At the lower levels, that’s where all the velocity is. That’s the main catalyst for higher inflation, but it’s kept at bay because it’s at high levels. It’s interesting Powell’s involvement and what the cause of that is. In the end, if they’re the temperature creator that we’ve been referring to, it’s one of those things where the markets have rebounded because that was not what they were priced for at the end of 2018.

The indicators say we’re close to a recession. We were close in 2015. I said, “A recession is coming.” People laughed. By the end of the year, you can see we were flittering around 0%.

Human beings all have that element of fallibility where we form certain opinions that are based only on certain amounts of information. Click To Tweet

On the yield curve, you are briefly inverted too. There are lots of lots of signs. I’m assuming you don’t sit down and take December off and write 160 pages about things. What are you using during the year to keep a pulse on what’s going on? What feeds are you following, what podcasts? What newsletters? What are you typically paying attention to?

Twitter is a gold mine. It’s big mind sync. If you can manage your Twitter feed better than me, you’re a better person. I happen to like Zero Hedge. You got to have a filter. Zero Hedge is great. I’ve had people tell me I’m an idiot for following Zero Hedge. 700 of my followers follow Zero Hedge. Everyone I know who I think is a big-brained Wall Street genius type, they all follow Zero Hedge. I would say Zero Hedge is indispensable. You can’t believe everything because they get stuff wrong, but they’re way ahead of people. Between those two, the stuff I can pick up on, the fly off Twitter is exciting.

Who are you following on Twitter specifically?

I’ve got a list of about 170 people who are on a list. I’ve got a much larger follower list, but I use my cold list and the guys I watch all the time. I watch it for Hussmann, Felder. My favorite person is Rudy Havenstein. He is a hoot-and-a-half. He’s the comic of Twitter. There are certain journalists I keep track of. Lisa Abramovich is good. Kate Long knows the bond market. Chris Whalen, there’s people coming across the feed all the time. Josh Crumb, Luke Roman. These are all people who are the junkies of financial Twitter, everyone knows their names. We’re all following the same people. They’re all entertaining guys. They don’t all agree, but they’re out there battling and posting. If you’re on Twitter and you’re there to share cooking recipes, it’s a colossal waste of time. I bang on the politics a lot.

When the Mueller report got summarized, I was having a field day for about a day where I was pointing out that 500,000 articles were written on Russian collusion, that is the number in a couple of years. There were people who are completely and utterly clueless and the media is completely and utterly clueless. Who knows about obstruction? The fact of the matter is they blew it. The Democrats blew it. They played their cuts. They believe their own press. It was hysterical to me. It’s like the Covington MAGA hat boy, they completely screwed that up. Every couple of months, they completely screw up a story. You got on Twitter and you’ll see their stupid stuff and you go, “I can’t believe those journalists are missing that.” It’s like a huge cocktail party where everyone’s drunk as a pig in Wall Street.

When’s the debate? What’s the date and time for that?

It’s sometime in April.

Do you have nothing definitive?

If you pay attention to my feed, I can guarantee you it’s going to be posted a few times. I don’t think it would be that exciting. It’d be archaic. I’m playing the straight man through this other guy. I don’t want to name because it hasn’t happened yet, but I think I’ll be poking. He’ll be explaining, I’ll be going, “What about this?” That’ll likely be the tenor. There’s the podcast himself. I like the guy.

Who’s the podcaster? Are you not allowed to say that either?

It’s Mac Abraham. We’ll see what happens. It shouldn’t be combative in my opinion. It should be a nice discussion.

TWS 13 | Economy

Economy: There’s a tremendous amount of trust for people who are considered so-called experts.

 

When you have that type of contention, that never leads to a productive dialogue. I’m excited for you to do that. That should be an incredible experience. We will let our audience know that they can chime in or at least listen in. David, this has been an awesome discussion. Thanks for taking the time. Is the best way for people to follow you Twitter or are there other ways?

If you search my name, the top links are no longer chemistry. @DavidBCollum is my Twitter feed. You can find me there. Anyone who passes the minimum IQ test could find me because I’m in the Department of Chemistry at Cornell. If armed with Google, that is not enough information. You need help. I get emails from people, some rather stunning ones sometimes where I go, “I didn’t expect that one.” I am the Paris Hilton of finance now.

I thoroughly enjoyed reading through your material. Thank you for the research that you do. I know it’s making a difference. Hopefully, with the combined efforts of others that when things start to get a little haywire, there’s enough influence to make sure the decision at the bottom is a good one.

I’ve never been on Twitter through a downturn. That’s going to be fun because my Twitter experience has all been during this big tenure.

You have been bearing one of the biggest runs.

He’s calling you an idiot in public. I’ve been chastised. One guy said semi-complimentary. He said, “People listen to you. You should be more careful.” I said, “If they’re listening to me, they’re in trouble already.”

There are a lot of freedom fighters out there that understand a lot of fundamental principles and basics and see the nonsense in what’s going on. I see why. Typically, that theory isn’t valued. Correction ensues because hindsight is one of the best teachers.

I’ll throw out a lab pitch for your readers. Of the many things I’ve focused on and said, “That doesn’t make sense.” The Roth IRA is a bad idea and is relative to a regular IRA. It has got a mathematical hole in it that’s a monster. I’m looking at this and I figured out and then I go, “Why haven’t people figured this out?” I don’t know.

What is the hole specifically?

The hole is if you get taxed the same at the beginning or at the end, which is the Roth versus the regular. The results are the same. It’s 4th-grade math. Timing’s irrelevant. You are taxed 20% in front of 20% at the end. You’re getting to the penny the same amount. The problem is the Roth IRA, you voluntarily put in money, pay the tax on money at the marginal tax rate. You’re taking the top sliver off like a 35% tax rate for some people. You’re voluntarily paying the high tax rate, whereas in the regular, when you pull it out it comes out over the effective tax rate. It comes out over all the brackets. The effective tax rate uses around 12% to 15% lower.

What if it is higher in the future?

The cost of government shows up as inflation - called hidden tax - and it erodes your spending power as attacks. Click To Tweet

It could be higher but that’s about no one knows. All I know is you’re giving up 12% to 15% upfront based on that logic. I want to ask him, “Why do they market the Roth?” He said, “You’re selling Corvettes, you sell the red one.”

It’s the bet of what you pay now versus the bet of what you pay in the future. The math gets the same rate. You’re paying the same. You can make a bet of not paying now, but then if taxes go up in the future, AOC says 70%.

Against the 70% but you’re still paying the effective tax rate at the end.

How do they calculate the effective tax rate in that regard?

There are actually calculators online that do it.

You put all the margins and it creates the effect.

It comes out starting at 0% and then 5% and goes up to 35%. No one’s effective tax rate is ever higher than their marginal by definition. They would have to drive the tax rate so high that the effective tax rate would soar and that’s almost impossible.

Change the tax code to tax withdrawals.

Even when the margin range was up 80%, 90%. Back in the early ‘60s, the effective rate was way lower.

There are trillions and trillions of dollars in qualified money. It comes down to at what rate you pull it out in the future. That’s the determining factor. David, thanks. This has been insightful. I appreciate your work. We’ll make sure that we get the word out, increase your listeners a little bit. Hopefully, as things start to manifest and a lot of the stuff that’s been deferred for a good part several years, that there’s enough influence out there. The culprits or those that created the whole thing are held accountable.

The system will break and then they’ll blame something else.

TWS 13 | Economy

Economy: The fact of the matter is the Democrats blew it. They played their cuts. They believe their own press that itches.

 

Those guys will be long retired. Alan Greenspan, he’s on his last leg.

His reputation as has dropped. His legacy finally got uncovered.

Have you seen that new documentary? It’s relative to the bailouts and what’s occurred since then as far as what Greenspan’s reputation. It also has some interviews with Bernanke too supposedly. I can’t remember the name. Where we’re at as far as social media, as far as information and how quickly it transfers, accountability is a lot more probable these days, especially at those levels.

If the next recession we get through it without a big deal, then I would say that I called her on. I’d be doing me a call if we get through another one.

It’s one of those things where it’s an artificial manipulation. If it was a free market, there’s going to be a correction. There has to be. If you have a manipulation, then it papers over the problem.

You’re out of manipulation. At some point, you get to the end of the rope and the next one is going to do it. Has it started? I’m on record saying I think it started in December.

With that little correction?

When the NBER announces when the recession started, I’m on record saying, “I think it started in December.” Watching auto sales and stuff like that. When they start, they start ever in perceivably. You don’t notice it. There was a poll done in 1991. They asked 51 economists whether there would be a recession that year and all 51 said no. Not only there was there but when the poll was done we were in it. That shows you how hard it is to detect when it started. When did the avalanche start? You noticed when it finished.

There are many fundamental issues and if it goes, it’s going to go. The talks by Howard Marks are interesting and I’m not sure if you’ve read his book. He hits upon the emotional state of things, the feeling state of things collectively. There’s this fundamental variable, fear, greed or passiveness and what that has to do with market cycles. The book is Mastering the Market Cycle. That’s interesting because Twitter is probably given you a good pulse of what the sentiment is out there.

It is bi-modal. You got the Yahoo saying everything’s wonderful. You got the bear saying, “I think it started.”

I’m excited to see what happens. For those that are in the know, for those that are prepared to make certain decisions, it’s going to be a great opportunity. There’s going to be a lot of people that pay a dear price for it.

Important Links:

About David Collum

TWS 13 | EconomyDavid Collum is the Betty R. Miller Professor of Chemistry at Cornell University and is a regular and valued presence on the internet commenting on the financial system and the predicaments of our time. David has contributed many Year in Review articles and podcasts to the Peak Prosperity community, all of which are available online at www.peakprosperity.com.

 

 

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Patrick Talks “Multi-Family” Real Estate With Michael Blank / Property, Episode -4

Patrick Donohoe welcomes Micheal Blank as his special guest for Property, Episode-4!

Michael is an entrepreneur, investor and personal development coach.  Originally, Michael made a large amount of money developing software during the dot com boom, and after diversifying is career, he found a passion for investing in multi-family properties.  His company Nighthawk Equity currently controls over $65 million in performing multi-family assets all over the United States and he dedicates tons of his time helping others become financially free in 3 to 5 years by investing in apartments buildings with a special focus on raising money.

 

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Patrick Donohoe talks about entrepreneurship and Real Estate with Nick Vertucci!

Nick is and educator and the founder of NV Real Estate. He came from a very humble background.  His life is “that” story.  The “rags to riches”, American underdog type story that many of us love to hear about, but wouldn’t wish on their worst enemy!

Nick hailed from a humble family, which could hardly make ends meet.  His situation got much worse and more difficult when his father died when he was only 10-years old.  He’s been running his own businesses since we was 18 and he’s been through pretty much everything an entrepreneur can go through!

Fast forward several years and his company NV Real Estate is doing fantastic and it’s for this reason and so many more that we’re honored to have Nick on this episode of The Wealth Standard.