Wall Street Week 07/12/2024

On this edition of Wall Street Week, Key Square Capital CEO Scott Bessent says that the Fed hasn’t been very independent under President Biden. Columbia Law School Professor Kathryn Judge tells us how the Supreme Court’s Chevron reversal could affect bank regulations. Former British Ambassador to the US Sir Peter Westmacott looks at the Labour Party’s economic challenges. Equity Group Investments President Mark Sotir picks up the baton from the late Sam Zell, and Aspen Economic Strategy Group Director Melissa Kearney talks about fostering dynamism in the US economy.
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The White House drama continues. Bank earnings get started and Chair Powell walks a line. This is Bloomberg Wall Street Week. I’m David Westin. This week, Professor Kate Judge on the bank reserve regulations Jay Powell says are on the way. This certainly looks like what we’re going to end up with is a very different suite of reforms. And Mark Sotir of AGI, the man picking up the baton from legendary investor Sam Zell. I miss him a lot. He was my mentor and a great human being. But we’ve all been in the roles for years. We begin with the US economy. After a week when Chair Powell said he was gaining confidence, but not yet enough to claim success in controlling inflation. And then on Thursday, US CPI numbers seemed to underscore the progress he is seeing. For an investors perspective on the economy, we welcome back now Scott Bessent. He is founder and CEO of Key Square Capital. So, Scott, great to have you back with us. David, always good to be with you. So we heard from Jay Powell this week and he said, look, we’re looking at something in the 2.5 range and inflation going in the right direction and labor markets still pretty strong. Growth is pretty strong. It looks like a pretty good economy. Is he right? I think if we look at the aggregate numbers, aggregate aggregates are good. But, you know, the Chinese have a central plan and, you know, they tell us they have a 5.5% of the GDP target. So GDP looks good. But underneath the hood, you know, they’re there’s some alarming things. The last jobs number, 50% of the jobs were created by the government. If we have government adjacent, which is health care and education, it was up to about 80%. Inflation is slowly coming down. The shelter number came down this month. And, you know, I don’t think the Fed needs to be in a hurry. They had been with this so-called DOT plot, which I think they should get rid of, because it’s becoming an embarrassment for them. They’d been at three cuts for 2024. Just at the June meeting, they adjusted to one cut and now the market is pricing in two or three for the year. So, you know, it’s all over the place. So, you know, having been very wrong, why not take your time and make sure and, you know, see what happens? So let’s talk about what you think a second term with Donald Trump might mean for some of those very factors you’re talking about. Look at that, bottom 50%. The people are really feel that they’re hurting right now. What would he do given this economy, given that it’s pretty good from most measurements? What would you do to really make it that much better? Well, what is, I think, going to have to reprivatize the economy because this is running on government spending where it’s at 7% peacetime non-recessionary budget deficit. This is unheard of. You know, I have a piece out today saying for the first time, interest costs are exceeding our defense spending. So, you know, the spending is now becoming also a national security issue. So, you know, I think we are going to go back to, you know, under Donald Trump, the private sector pushed the economy. We didn’t get inflation because the private sector impetus was met with deregulation. Under the Biden economy, they had big government spend, but it was met by increased regulation. That’s the formula for inflation. There’s a lot of talk, as you know, about getting the deficit under control. But President Trump in his first term did not get the deficit under control. I mean, if you look at this, the Committee for a Responsible Federal Budget, they say under his administration, we added $8.4 trillion and 4.3 trillion of that was not COVID related. We added a lot under Biden as well, but actually substantially less than under President Trump. Well, they’re using CBO projections, not the actual numbers. We’ll talk about taxes because that’s also a concern. In that piece you referred to about Bob Rubin and Ken Chenault, they actually said there’s a problem with the tax extending the tax cuts that we had back in 2017. If you extended that, that would really substantially increase the deficit because only and I think there’s a CBO number you correct me if it’s wrong, but only 20% of those tax cuts actually paid for themselves. Well, I think this time around and I think with Trump 1.0, you know, we got to stop the clock at the end of 2019 because, you know, COVID was a game changer. And I think that there is big appetite for pay-fors this time. So I think we would get this Orwellian-named Inflation Reduction Act under control, I think, and save a trillion on that. If you empower states on Medicaid, you know, that’s that’s another trillion. I think that there will be some tariff income. So I think that there is a big appetite to reinstate the tax cuts, but with pay-fors. Well, tariffs, there will be income to the federal government, but the money would come out of consumers pockets, would it not? I mean, China doesn’t pay that money. Consumers pay it and it might stoke inflation. Well, look, I think that if you are if we have 40 or 50 of our oil and we have deregulation, we have higher growth, we control immigration at the border because, you know, this unfettered immigration, you know, now the economics profession had for years said that somehow the one thing that didn’t respond to supply and demand was immigrant labor. Now they’re saying, oh, no, they it does suppress inflation, increases economic growth. So I think if we secure the border, the bottom 25% of Americans will see wage increases. President Trump is talking about more than securing the border. He certainly has been talking to that for a long time. He’s also talking about deporting a lot of people who are not documented here now. Wouldn’t that reduce the workforce and therefore increase wage costs and inflation? It could for the bottom 25%. Those people are not working in Microsoft and not even in middle income jobs. And I don’t know about you. I’ve got no problem as the bottom 25% gets a much deserved wage increase, you know, under Trump, 1.0, you know, working class Americans did better than the top ten or 20% in the Joe Biden economy. It’s been great know, in the Biden economy, you either own assets or you don’t. The stock market’s at a record high. Housing prices are at a record high. Bottom 50% of Americans have debt. You know, most households couldn’t meet a $500 medical emergency. And I think it’d be great if that group got a wage increase. One last one, another issue raised in that piece in New York Times you refer to is the independence of the Federal Reserve. And I’m not sure how much we’ve really heard from President Trump himself about that. We’ve heard from people like Peter Navarro who’ve talked about firing Jay Powell. I’m not sure what his plans are, but how important is that? I know you’ve been concerned, actually, that the current Fed chair has not been as independent as he should have been from President Biden. Well, look, let’s go back to the original sin, the original sin of the independence of the Fed. Jay Powell was reappointment was the latest this century for a Fed chair, latest this century. And I think that that is what stoked or certainly they accelerated the inflation. At Jackson Hole, August 2021, you go back and read Jay Powell speech. He knew inflation was hot. Biden administration did not announce his reappointment until November. So they had him under the thumb. He could have he could have been a good patriot and risk his job and started raising rates. But he didn’t. So rates didn’t get hiked. They didn’t start the hiking cycle until March. And he knew inflation was getting hot in August. But back to your question on President Trump. Look, I think he’s going to make his opinion known. I think what is happening with the, you know, this Ruben editorial and what I’ve seen with a plethora, even Larry Summers and, you know, 16 Nobel Prize winners who, by the way, 13 of them said that the Biden spending would not be inflationary. Two of them are dead. So I don’t know where the other guy went. One is married to Janet Yellen. So, you know, the Biden economy hasn’t worked. So they’re trying to create the bogeyman of Trump 2.0. I don’t think people are going to buy it. But, you know, to finish with the Fed, President Trump’s going to make his opinion known. And my advice to him would be to announce as early as possible, do the opposite of what the Biden administration did. Give forward guidance on the new Fed chair. Fascinating. We’re always great to talk with you, Scott. Thank you so much, Scott Bessant of Key Square Group. Coming up, bank reserve regulations are back in the news with the testimony of Chair Powell. We talk with banking regulation expert Kathryn Judge of Columbia. That’s next on Wall Street week on Bloomberg. This is Wall Street Week. I’m David Westin. In his testimony before Congress this week, Fed Chair Jay Powell spent a fair amount of time on those proposed Basel III regulations and specifically when we can see a new version, given the agency’s decision that more than just some tweaks were needed to what the agencies first proposed. To take us through where we are, we welcome back now Kathryn Judge. She’s professor at the Columbia Law School. So, Professor, thanks so much for being back with us. We don’t know what they’re going to come out with. It looks like later on this year won’t go into effect till sometime next year. But do we think basically they are cut back in some of these reserve requirements? That is certainly what it looks like right now. Powell has said on multiple occasions that we should expect broad and material changes. Again, this is not just the Fed. The Fed has to work closely with the FDIC and the OCC, but it certainly looks like what we’re going to end up with is it a very different suite of reforms than those that were proposed about a year ago. So there are specifics with regulation like this that’s coming down the pike and we’ll find out where it ends up. But we also had a pretty momentous, I think, term in the Supreme Court when it comes to regulation, not necessarily involving bank regulation, but about regulation overall, but particularly the thing that people are focused on is Chevron, the overturning the Chevron doctrine in which the courts would defer to the agencies determination of the statute, could that affect banking regulation as well? It certainly could and will. I mean, if you look back historically, Chevron was actually one of the key vehicles that facilitated deregulation during the 1980s and 90s. So as you just said, the core idea of the Chevron doctrine is when a statute is ambiguous that’s going to be treated as a delegation to the relevant agency to figure out the best interpretation under the circumstances that they’re facing using their expertise. And so in the 1990s, that was a mechanism through which they said, look, banks have to engage in a far broader array of activities than we previously thought. In the short run, I think banks are celebrating this as a win business, is celebrating this as a win. Longer term, it’s really hard to know. It really creates a lot more legal uncertainty. It does reduce the relative certainty regulators are going to have regarding the whether or not the rules are going to be respected. And it puts courts in the driving seat in a way that that I think could really shake things up. So I’m going to ask you something, do something you’re not going to want to do is to speculate. But we don’t know. But you teach regulation and the legislation with respect to particularly financial institutions, as we look at various regulations that are pending, including the Basel III, but not limited to that right now, do we think that that may affect the way they go about making their rules? Because now they’re very conscious of the fact that they’re going to have a court of some sort looking over their shoulder right quick. Yeah. So two things. One, I think it’s certainly going to affect the way that they undertake rulemaking Basel III and otherwise. That’s partly because, again, no, probably just overall Chevron, but there are also a number of other significant Supreme Court decisions that really allow courts to scrutinize far more closely the decisions that regulators are making and the processes through which they’re making those decisions. So there is a risk it’s going to make regulators a little more gun shy and a little more worried about making sure they’ve crossed every single tee and have dotted all of their eyes before they promulgate regulation. That being said, bank regulators are also bank supervisors, and they have an ongoing duty to really promote the safety and soundness of the institutions that they oversee. So you could end up with a world where regulation is not able to keep up with potential changes in market dynamics or risk that supervisors are seeing a lot more work gets done through that supervisory process, which is far less transparent and far less uniform. Well, so this is a fascinating point I hadn’t really thought about. It may shift away from the regulatory approach where they have a notice and comment every comment and we know what’s going on as opposed to, I’ll call it prosecutorial discretion of a sort through the supervisory function. That’s a very different kettle of fish. It is a very different kettle of fish. It’s one banks have had to deal with for a long time. But the question is relative importance. One of the ways of understanding Chevron, particularly as it’s been narrowed in recent years, is it created a real carrot that really encouraged regulatory auditors to undertake notice and comment rulemaking, which is very time consuming, very resource intensive process, because at the end they knew they were going to get this carrot called Chevron deference. Now that you’ve taken that carried away, it puts a lot more onus on the regulators to think, well, what is the right tool of the various tools I have available for trying to achieve a particular end. It still might be regulation in some set of circumstances, but it could also be supervision for banks to be things like the living will process that we’ve seen being a mechanism through which you get kind of change over time. It could also potentially affect the CFPB, policymaking through enforcement rather than clarify with certain terms, mean use enforcement policy, be a mechanism to which you make policy. So again, I think it certainly changes the world around regulation by rulemaking, but that doesn’t mean long term it’s really a win for business. And finally, Professor, we now are into the earnings season for the banks and we started with the big banks. I wonder about unrealized losses, particularly from some of those treasuries that are standing out there, which may not be such a mess. So much pressure for the really big money center banks, but is much more for the regional banks as we saw, for example, with Silicon Valley Bank. Do those unrealized losses have to get realized at some point, what effect could that have on the overall system? Yeah, I mean, so this has been a challenge that again, took people off unexpected, an unexpected way in Spring of 2023. SVB and Signature were really messy failures that require very extraordinary measures by the FDIC and other financial regulators. That being said, at this point, everyone sees it’s coming. Everyone’s paying a lot closer attention. So I don’t think we’re going to see the same type of disruption. Whether or not they’re going to realize them, I mean, again, partly it’s a question of accounting and what is the bucket in which banks want to put these instruments. They’re going to have to pay attention to more attention to them for regulatory purposes, even if not for financial statement purposes, because of changes underway. But again, the real key for for a bank, generally speaking, is you’re using deposits which are nominally short term, but in practice in most states of the world are really sticky and long term. Define longer term assets, that includes Treasuries, but it also includes a lot of loans. And so there’s reasons that we allow banks to to hold these instruments and for banks to think that at least in most parts of the world, they’re going to be able to hold them to maturity. We just want to make sure that banks are really managing the duration risk associated with their operations. Professor, it’s always a great treat to have you with us. That is Professor Kathryn Judge of Columbia. Coming up, Sir Keir Starmer has won his large majority in the British Parliament. Now, what’s he going to do with it? We ask former UK ambassador to the United States, Sir Peter Westmacott. That’s next on Wall Street Week on Bloomberg. This is Wall Street Week. I’m David Westin. Last week saw a Labour government sweep into power after spending many years in the wilderness. But the size of the majority did not necessarily indicate how much the new Prime Minister, Sir Keir Starmer, can do with it. We turn to someone who spent his career in the British Foreign Service as ambassador to the United States, France and Turkey. For his views on the nature of the win and what we can expect next. The interesting thing is that although they have got a huge majority and the working majority will be of 170 or so, they’ve only in fact received slightly less than 2% more votes from the British public than they did last time. So what’s happened is not so much that there is an overwhelming vote of confidence in the Labor Party. It is a sense that throw the bums out, if you like, that the Conservatives had run out of road and run out of trust and run out of support. And people have to some extent voted for the Labour Party. Certainly 10% more voted for Labour than for Conservatives. But there’s also been 14% for the right wing anti-European Party of Nigel Farage. And the Scottish Nationalists lost big time to Labour in Scotland and the Liberal Democrats have won more seats. They’re going to have 71 seats in the new parliament, which is a historic high. They’ve never done that well since the party came into being. So everybody has done well except for the Conservatives. Which leads to at least an interesting question, which is normally we think about a mandate when you have this large a majority. If it was a vote against the Conservatives more than it was for Labour, when it comes to policies, what did the British people vote for in terms of policies? The slogan which the leader of the Labour Party came up with after road testing a number of different options was one word: Change. And their focus groups and political scientists told them that that was what the British electorate really wanted to hear. These guys, the Conservatives, have been in power for the last 14 years. We’ve had COVID. We’ve had Brexit, which hasn’t gone well. We’ve got no very little economic growth. We’ve got no productivity, you know, investment and exports have been patchy, if not if not down in a whole lot of different issues and stagnant middle class incomes over the last probably 20 years, which is upset a lot of people. So they voted for change. They voted to get rid of the guys who’ve been in charge for the last 14 years. But the Labour Party was very cautious about not being very specific in terms of what that change would bring. They didn’t want to talk about Brexit, which almost three three quarters of the British people now recognize was a mistake. Doesn’t mean to say three quarters of the British people want to go back into the European Union, but most people reckon that was a mistake. They didn’t really get discussed. The Tories didn’t want to talk about it because it was their handiwork and the Labour Party didn’t want to talk about it because they were frightened of losing votes, which have become first time conservative voters and who were traditionally their supporters. It changed, but not a change in taxes, as I understand it. We’re not going to increase taxes, and yet we want to increase growth, productivity and investment. How do you do those two things fiscally? Where do you come up with the money for that? Well, they’re going to have a little bit of a cushion fiscally because they revised the numbers for growth and we’re now looking at 0.7% for the first quarter of this year, whereas people thought it was pretty much stagnant. So there’s a little bit more growth coming in. There was quite a lot less inflation. We were up at 11% last year, the highest point, and we’re down to 2% now. There isn’t any evidence at the moment of productivity increase. Exports have surprised people by doing a bit better, particularly of course, to non-European markets. So there’s a little bit of extra cushion that extra wiggle room coming in there. But the other thing, David, to be clear about is that they’ve said we will not be raising income tax and we will not be raising corporation tax. But they have not said they will and they will not be raising VAT, which is a sales tax. But they have not said anything about capital gains tax and they have not said anything about some of the other business-specific taxes. They’ve not said anything about windfall taxes for energy companies, which have made a lot of money out of the rise of global prices as a result of the Ukraine conflict and so on. So the big headline tax issues, they’ve said, no, no, no, we won’t mess with that. But they haven’t excluded some other things and they are going to put tax on private education fees, which they’ve never but nobody’s ever done before in the United Kingdom, which will raise a bit of money. And they have done something which the Tories had already done, which was to change the non-dom, as we call it, the non-domicile tax regime for very wealthy people who have an expatriate status and who live in the UK but don’t get taxed on any of the wealth that they have outside Britain. They’re changing all that which the Conservatives already promised to do it, the Labour Party say they’ll go further. I’m not sure how much further they’ll go. I worry that we might just drive away a lot of the wealth that we need for our economy at a time when it’s still pretty fragile. So there are some areas of tax where they’ve got the option to raise more money, but they are scared of being deemed to be business unfriendly. And you may have noticed that even in the first day or two after the election. Stock markets rallied. Sterling did a bit better. The business community at the moment anyway, it doesn’t seem to be too scared. And they probably quite like the idea that with a whopping great majority, there is going to be some political stability and maybe some policy stability for the next four or five years. So Peter, let’s talk about the relations in the United Kingdom and Europe. You mentioned the name that must not be named in the campaign of Brexit that nobody wanted to talk about. What do you anticipate this Labour government might do with respect to Brexit, I understand maybe not pull back entirely, but maybe modify it around the edges? Keir Starmer has said, and so have his other ministers, that there will be no return to the single market or to the customs union under a Labour government. So that’s pretty definitive in terms of not turning the clock back to pre-Brexit days. Was that necessary to ensure that they got a substantial majority? Perhaps. It may also be realistic in that the price of going back on the deal, which is very Europe favorable, frankly, the price of going back on the deal and negotiating by Boris Johnson would be quite considerable. There would have to be a restoration of free movement of labor, which is free movement of people, which is a political hot potato, especially for the Conservatives. But it’s also going to be tricky for the Labour Party. Sir Peter, thank you so much for being with us here on Wall Street Week, really appreciate it. That is Peter Westmacott, he is former British ambassador to the United States. Coming up, legendary investor Sam Zell left some pretty big shoes to fill. We’ll talk with the man with the job, Mark Sotir of Equity Group Investments. We invest in companies for the long term. That’s next on Wall Street Week on Bloomberg. This is Wall Street Week. I’m David Westin. Equity Group Investments was the investment firm Sam Zell ran so successfully for so many years. Mark Sotir for many years served under Sam as president of the group. And we walk him now to Wall Street Week. So welcome, Mark. Great to have you here, David. Thanks for having me. Sam Zell was such a friend of this program. We so benefited whenever he came on. And so we’re really fortunate to have you here. First of all, talk about that transition because those are really big shoes to fill. You were president before Sam passed away, but talk to us about that transition where you are in it. Yeah. So thank you, first of all, for having me. It was a long transition and continues to be a long transition. Sam put me in that role nine years ago and when he did it surprised me. I’m an operator. I ran companies and I never expected to run this business. And he said, Look, it’s a business. I if I could come back in and look at the place 30 years from now, I want Equity Group to be there and healthy and running. And so I want somebody who can run a business. That was again nine years ago and he said, I actually don’t need you today, but I need you to start planning for and I’m not here. And so dial it that far back. We’ve been working—myself, the family, Sam’s son-in-law is involved in family office—we’ve been working at this for a decade. And so, you know, it’s a big loss to have him leave us. And I miss him a lot. He was my mentor and a great human being, but we’ve all been in the roles for years, right? So this isn’t a, Wow, Sam’s gone now. What do we do? He was really good at not just letting us practice but actually run the business. And he slowly kept stepping back year after year. And I would say the last two or three years we didn’t really talk about deals. We talked about people, we talked about developing people. We talked about we have the right people. So the development kind of moved into that phase. And and, you know, so far, I don’t want to say it’s been easy, but it’s been reasonably smooth for that big a change. So a long evolution, certainly with Sam no longer with us. But also I wonder in the nature of the business, I mean, I think of Sam as a real estate investor going back to Ann Arbor and student housing right where he started out. I don’t think Sam Zell so much as a private equity guy. Yeah. So that I think is something that a lot of people don’t realize. Sam, I think more than anything was a person that just evolved over time. So that real estate back in the 60s and 70s, that’s what he did. Then he built the REITs and went public with all this. And that was in the 70s and the 80s, early 90s, real estate started to get crowded at one point and so he actually moved into distressed investing. So he was doing good company, bad balance sheet type stuff back before the phrase existed back in the late 80s or early 90s that started to get crowded. And then he went overseas and he went to Argentina and China and India invested overseas. And again, people don’t know that as much. And now we’re in a different stage. We’re kind of concurrent. We’re doing a lot of business with lower middle market more in the US, a lot of family run businesses. So especially coming out of COVID, there’s a lot of owner operators who’ve kind of realized that their company is growing, they need more capital. But the flip side is 98% of net worth is tucked in that one company. They don’t want to sell out, right? They don’t they’re not ready to retire and they’re looking for a partner. And so they’ve a lot of them have heard about private equity and there’s good and bad about it, but they don’t want to sell the company to someone and then have it flip three years later or four years later. And so, you know, that’s who we are. We tend to own companies for a very long period of time. And, you know, Sam, with his background in, frankly, how we built the organization, we show a little bit more patience, I think, with some of these companies where there’s been a founder, the names on the door and they’ve been doing it for 20 years. So that is really, really different when you think about it. First of all, I don’t have to if I owned a company for 15 years and you own five, I have to find one third as many companies. So that’s a benefit. We’re very big on compounding, right? So Sam was a real advocate of if I find something, stay with it at the end of the day and we reinvest in our winners. Okay, So you take a typical private equity firm. Let’s say they invest $100 million in a company and they double it, right? Or maybe they triple it, then they definitely want to sell it. When we make three times our money, we look at it and we’re like, Look, we have the right management team. We’re in the right industry with the right company. We probably get the right processes in and in our minds, that’s the best risk return we can find. So as you said, your patient capital, you’re the definition of patient capital and you say it’s ten years, 15 years, even 20 years, but there is an exit at some point. So how do you plan for that exit down the road? Yeah, it’s a good question. We start and saying, what do we say this? We like options. Okay. So even the word plan, it’s very hard to plan 15 years. I pick an industry, I don’t know what’s going to happen 15 years down the road. We try to be nimble. We try to have multiple ways to exit over time because things change. At the end of the day, people ask me, Well, when do you exit? What makes you decide to exit? And it’s usually something about the industry that we see changing down the road and we say, Wow, in a couple of years that’s going to be a lot harder and a lot different and it’s probably time to move on. It’s not because it’s not because management wants to move on. All right. We do a lot of succession planning. It’s not, as I said, because we’ve been very successful. If I think there’s more room to run with that company, we have the capital and we have the expertise in management. We just keep running. At the end of the day, it’s typically the is changing in some way and these are all positives investing for the long term, the negative and it’s it’s hard is almost every industry over time gets disrupted and you have to watch for that. Like what we’re not doing is buying an office building and just letting it sit there for 20 years. That’s not when we talk about long term investing, we’re taking companies and we’re building them and growing them over time. We’re in logistics. What’s logistics and look like in 15 years? I don’t know. Okay. But we’re thinking five years out, seven years out, keep an eye on it and if we see something that’s going to change that we think is going to change, that’s probably where we’re going to get ourselves out of it. Are you growing or are you steady state? No, we’re growing. We’re growing. We’ve had a good few years for sure, and for the reasons I just described. Right, that not everything’s worked right. We’re not miracle workers, but this this approach. And it’s not me doing it. It’s me using Sam’s principles and using the capital that’s provided. Right. If I just started my own firm and raise my own capital, I would probably do it the way most private equity firms do. But I’ve got this asset right, which is very stable capital. I can sell companies when I want. If I don’t see a good company to buy this year, I don’t right. So when a PE firm raises capital, they get to put it to work. All right. I have a call on capital and if I see interesting stuff, I buy it. And if I don’t, Oh, I just don’t. And that I think if you look at today’s environment with with interest rates, they climbed you know, a couple of years ago, all the selling activity slowed down. Right? It was the debt markets got a little difficult for a while and multiples came down and people said, oh, I’m just going to wait. So then you see continuation funds spring up, right? Those get a little complicated. You take in an asset with one set of investors moving it to another set. We are a continuation fund. We just we just keep running our business. At the end of the day, we don’t have to lever a portfolio. We don’t have to do any of those kinds of things that some other firms are working towards to kind of hang on until they think it’s a good time to sell. If if it’s time to sell, we’ll sell. And if it’s not, we’ll just keep running our business. It’s a great story, really fascinating. We’re fortunate to have you here to tell us. Thank you so much for being here. We miss Sam, but we’re glad to have you. All right. I appreciate it. Thank you. Thanks so much to Mark Sotir of Equity Group Investments. Coming up, it’s time for the annual gathering of the Aspen Economic Strategy Group focus this year on dynamism in the US economy. We’ll hear what to expect from the director of the group, Melissa Kearney of the University of Maryland. That’s next on Wall Street Week on Bloomberg. This is Wall Street Week. I’m David Westin. At the end of the month, prominent economists, business leaders and policymakers will gather again in Colorado for the Aspen Economic Strategy Group meetings. Wall Street Week was there last year when the subject was building a more resilient US economy. If you look at the economy, it’s a pretty resilient economy. You know, we’ve been through a lot of challenges and we look we look pretty strong today in a relative sense. A lot of people think, oh, this is a technically hard issue. But what we’ve seen at this conference is a bunch of people saying, well, gee, if you do this and you do that and you do that, you can make real progress. It really is a question of political will. And we’re trying to keep the fires burning. We are not focused on the short term. Okay. We’re focused on the longer term. And when we get Democrats and Republicans together, there’s really not that much difference between us. Right. And that gives me hope. This year, the subject will be strengthening America’s economic dynamism. And to set the stage, we welcome back now University of Maryland economics professor Melissa Kearney, who’s director of the Aspen Economic Strategy Group. So, Melissa, we’re really looking forward to this at the end of the month. Give us a sense of that. I think it’s sort of a pivot. We’ve gone from resiliency now to dynamism. What is the state of dynamism? What are the questions you’re asking? That’s right. Well well, thanks for having me back, David. And we’re looking forward to having Bloomberg return to Aspen at the end of the month to be with us for this meeting. So the reason why we’re shifting the focus now from resilience to dynamism is because our economy has proven to be quite resilient. It’s in a pretty strong position. We came out of the pandemic and the economy really was resilient. But now the nation is moving very deliberately away from some of the market principles that have guided economic policymaking in this country for decades, that have led to great improvements in innovation and living standards. And that poses, I think, a lot of important questions for a group like ours about how to how to frame a new economic policy regime, taking the nation’s move towards more protectionist nationalist policies in mind, and do this in a way that still preserves and strengthens economic dynamism as opposed to impeding economic growth. And so that’s that’s what we’re going to be focused on, that we’re going to take this apart in a lot of directions, talk about industrial policy, trade policy. But really with this goal of maintaining economic growth, innovation in the face of this national reconsideration and reconfiguration that’s coming from both parties. Exactly. It is for both parties, although the Biden administration in particular has embraced some of the industrial policy you’re talking about in the acts we’ve had. Let’s pick up on that. You mentioned industrial policy. When does it work? When does it now work? What are the questions again, you’re going to be addressing at this forum? Yeah, this is this is really critical. I mean, the conversation that needs to be had is not a simple one of is industrial policy good or bad, but rather, when is industrial policy appropriate? When is state driven industrial policy likely to succeed versus being captured by political and business interests? There’s also, you know, very important questions about how to actually design industrial policy. So if you think about what the proponents of industrial policy are saying, they draw on and they claim lots of policy goals, national security, a transition to a green economy, supply chain resilience, job creation, the revitalization of economic communities which of those policy considerations are goals are appropriate to to justify state-driven innovation and funding of particular manufacturing. When is industrial policy more properly thought of as sort of a political favors to swing states? When do national security issues really arise? What products should be thought about as part of the need to invest in in US capacity for production under the guise of national security versus looking to friendly allies or diversified supply supply chains? And so all of that really needs to be considered. There is also the very practical question about state capacity. Melissa, it used to be said that industrial policy was picking winners versus losers. There are some people now who are starting to question whether, in fact we’re only picking winners, that basically the government intervenes to help people across the spectrum. Does that interfere with dynamism? Do we have to and I hate to say this, have a little bit more creative destruction in order to guarantee that dynamism that’s driven the United States economy of the past. I mean, this is why sort of mainstream economists and I would consider myself one, get nervous when when the federal government is really taking an active approach to deciding which sectors or which firms to invest in. That’s not to say there aren’t real reasons and and opportunities for government subsidies to advance, you know, innovation, investments in basic science, for example, we know have really large returns. But there is a worry that that government funding can sort of just prop up firms that really, you know, wouldn’t be successful on their own and this is why the details of how these kinds of federal programs are designed are critically important. One of the things that I think has really sustained the US economy in recent years has been the fiscal intervention. A lot of money has been pumped into the economy and that leads to debt and deficit. How does that interact with the dynamism that we need in the economy? Oh, the US debt is a challenge that whoever wins the election, this needs to be a real issue that’s dealt with. The fact that by the end of this year our deficit will be 7% of GDP, unprecedented outside of wars or recessions, really impedes, um, impedes the federal government’s ability to make the investments that would be consistent with bolstering economic dynamism. This is a real drain on our fiscal capacity. It also, you know, makes us much less resilient in the face of future shocks that are sure to come. It also heightens the risk that eventually we’re going to have another financial crisis. And so addressing the debt absolutely needs to be part of any economic policymaking going forward. In an effort to improve the US’s ability to to make the investments that will bolster our economic dynamism. Melissa, here at Bloomberg, it seems as if we cannot have a conversation with anyone without talking about generative AI. Is that a potential driving force behind dynamism? How much can we count on it? Is it hype or is it real? Yeah, David, I have no idea what’s hype or real, but it does certainly add a lot of uncertainty in the background of all of this. What A.I. is going to do to the labor market, in my view, is entirely unclear. But I think we can be pretty confident that it’s going to shake things up. I mean, there are definitely going to be new jobs created, but there are also going to be jobs lost. This has, you know, experts say this has the capacity to sort of change the labor market and society in the same way that electricity or steam power did. So it’s going to be transformative. The challenge is it’s going to be transformative in ways that I don’t think anybody really has a good handle on. And so thinking about how our our country, our workforce, our students are in a good position to leverage the power of AI so that it’s a force for good, both in an economic sense and, I mean, personally, I’m really concerned about the impact it could have on democracy in the functioning of our of our institutions. We need to be getting ahead of this. I mean, this this brings us to a perennial issue of interest to our group. And I know of of Bloomberg, too, which is higher education is higher education, our colleges, our universities. Are they prepared to train students for the just the flexibility and the high level of skills they’ll need to complement AI and the changes that it that it brings to the labor market? Melissa, you and your colleagues have put a lot of work into this project. Give us a sense when you walk away from these meetings, if it succeeds, if it goes just the way you hope, what do you get out of it? What are your goals? Well, these meetings are, as you know, they’re very substantive. Right. We’re not just out there to have polite conversations. They’re bipartisan. They’re very substantive. They’re based in evidence. We bring in outside experts to complement the expertise in our group, depending on the topics we’re talking about. We commission briefing memos from the the nation’s leading scholars on all of these topics. The goal is for everyone to leave the meeting with a better, deeper understanding of the challenges of the possibility and bipartisan scope for solutions from both policymakers and the private sector going forward. And then to be in a better position to advance evidence-based solutions to these challenges in their relevant spheres of influence and action. That’s the goal. We’re all we’re all aiming towards a more prosperous, equitable society and implementing solutions to these great challenges is absolutely part of that. Melissa, thank you so very much and we look forward to being with you in Aspen again. That is Professor Melissa Kearney of the University of Maryland. Coming up, in case of emergency break glass, do we need a bit of artificial intelligence to help us choose the next American president? That’s next on Wall Street Week on Bloomberg. Finally, one more thought. Mutually assured destruction. It’s a term some of us are old enough to remember from the Cold War. A theory that the best way to keep the United States and the Soviet Union from destroying each other was for each side to know that the other would wipe it out if it moved first in a nuclear war. Things have certainly changed a good deal since the 1960s, when I was a boy reading Seven Days in May and Failsafe, afraid that the Russians would hit my hometown of Flint, Michigan, because of our auto plants. We’ve had arms reduction agreements and nonproliferation agreements, none of which stopped several other nations getting their own nuclear weapons without any clear and certain way of deterring them from using them. And now there’s a new potential threat to be guarded against, one that’s much harder to deal with because it can and we hope will be used to do a lot of good that nuclear bombs never could. It’s artificial intelligence, which many see as affecting every part of the economy. And I think it actually does run right across the entire economy. Maybe not to the same depth in every sector, but but nevertheless, it’s a very broad base. And AI may be every bit as deep as it is wide. Yes, it is profound. Yes, it is transformative. But as with any powerful tool, there are also some big potential risks. Risks that ChatGPT creator Sam Altman admits we have to be careful to guard against. I, I think there’s many ways it could go wrong, but we, we work with powerful technology that can be used in dangerous ways very frequently in the world. And I think we’ve developed over the decades good safety system practices in many categories. It’s not perfect, and this won’t be perfect either. Things will go wrong, but I think we’ll be able to mitigate some of the worst scenarios you can imagine. You know, bioterrorists like a common example, cybersecurity is another. Mustafa Suleyman, co-creator of Open Mind and now CEO of AI at Microsoft, has even proposed that the United States and China avoid an AI arms race by starting talks right away and a bilateral agreement to contain what’s coming sort of an arms limitation agreement like those negotiated between the United States and the USSR back in the 1980s. We will ultimately need global cooperation, but at this moment we have to be optimistic and encouraging of the nation state. There’s no way to put the genie back in the bottle. This really is happening. So the art is going to be around shaping it in the public interest and making sure that our democratic governments remain in control. So one’s concern is about escalation between countries, but another battle is being waged even as we speak, this one between employers and employees. IBM says that a substantial portion of the large corporations are using already is for talent acquisition. And how do we actually bring to life for us what we call ask H.R., which is really enabling, enabling us to have all 250,000 IBMers kind of become really productive and actually elevating our H.R. teams to truly higher value, perhaps skills, talent, recruiting and allowing us each day to self service. And the thing we love the most about it is it’s available to you 24×7, and it allows you to get really fast responses. Not unexpectedly, the other side is striking back. Recent studies from Resume Builder and Canva say that nearly half of job seekers are now relying on AI in their applications for help in putting together their resumes, to help write the cover letter, or for both. But wait, there’s one other place where maybe we could use AI to choose our next employee. Like maybe the person we employ as President of the United States. Americans are about to go to the polls in November with about a quarter of voters saying they don’t like either of the two candidates. So why not turn it over to the chat bots to choose our next president? And according to novelist Tim Dorsey, we wouldn’t have to worry about that mutually assured destruction business. He says that as things are now, our political process appears to be a toxic dance of mutually assured destruction that takes all the citizens down with you. But then again, we’d have to make sure that we weren’t creating some sort of doomsday machine. The Doomsday Machine? What is that? A device which will destroy all life on Earth. Dr. Strangelove. How is it possible for them to have built such a thing? It is not only possible. It is essential. I wish we had not had a doomsday machine. That does it for this episode of Wall Street Week. I’m David Westin and this is Bloomberg. See you next week.