Doug Holtz-Eakin

Welcome to the Puck Venture Capital and Beyond, the show that examines the changing landscape of our world. We'll have candid conversations with VCs, entrepreneurs, and thought leaders grappling with our current challenges and providing solutions to key problems we face as a nation. I'm Jim Beer, president of CMVG Advisors. This podcast brings change makers to the table to discover the inner workings behind their decision making strategies and ultimately how they got to where they are today. In the early two thousands, the bottom stopped dropping, and the top kept going up.

That doesn't bother me. Having more rich people doesn't bother me. I worry about the bottom end. I worry about poverty and people who are not economically self sufficient, and I think think we're spending too little time and attention on that issue. That's a crucial issue.

Our k to 12 school system is not delivering an education that's good enough for everyone to be assured of being economic self sufficient. I think that's an enormous national failure. I'm interested in making sure everyone has the access to be able to participate in the economy and be self sufficient. On today's episode of The Puck, I sit down with Doug Holtz Akin, an economist and a former director of the Congressional Budget Office, who served as the chief economic policy advisor to the late Senator John McCain's presidential campaign in 2008. He now serves as the president of the American Action Forum, a conservative think tank.

We discuss his ideas on more effective ways government can help better our economic future, the reality behind the national debt, and how to address income and wealth inequality. Doug, welcome to the puck. Thank you. Before we jump in, can you take a moment and tell us a little bit about your background? I am a PhD economist trained at Princeton University.

I was an academic for two decades, taught at Columbia and Syracuse universities, but I did a tour through the White House in nineteen eighty nine ninety for George h w Bush. Did another tour with George w Bush in 02/2002. Thought I'd go back to Syracuse, but then they offered me the job at the CBO. I was director of the Congressional Budget Office. When I walked out of the Congressional Budget Office, this guy named John McCain called me up and said, look.

You did good work at CBO. I'm thinking about running for president. Would you give me a hand? And because I had never been on any campaign, including high school president, I said yes. Had I known, maybe not.

But I did two thousand seven, two thousand eight full time on the campaign, was director of domestic economic policy, and then, I was unemployed. That's that's one of the things I didn't quite understand about campaigns. If you lose, you're you're done. And at that point, my kids were both in the DC area, and I didn't see any point in going back to Syracuse. And I was tired of being an academic, and I didn't wanna have a boss.

So I started my own think tank called the American Action Forum, and here I am, yield these many years later as president of the American Action Forum. Wow. Okay. So in diving in, I'd like to start with a heavy question. You may remember that July marked the hundredth anniversary of the invention of the Caesar salad In response to a Scott Lincecumbe tweet where he asserts that Caesar is indeed a top five salad, you responded, and I quote, weeds, Scott, all weeds.

No difference, no ranking. So, Doug, my serious question is why are you so out on lettuce? I'm, I'm an anti foodie. I I have the least interest in food of anyone I know. Okay.

And I eat because they tell me I have to. And I literally eat a set of preassigned lunches that my assistant gets me off a list my wife has constructed. Because left to my own devices, I will just have Diet Coke and Twizzlers all day. I'm good, and that I'm fine. Right.

But the people when I do my my checkups seem to think this is not a great diet for a 66 year old. It's weird. That's funny. Moving on. I wanted to have you on the show because we are an interesting point economically.

We just had Larry Summers on the show. And for those listeners who haven't checked out that episode, I'd encourage you to do it. But I think it's safe to say that you have different opinions than Larry on certain economic policy issues. Yep. One of the things I guess I'd like to jump into is, you know, what about your background and beliefs do you feel make you distinct at this time, and how how would you stress the challenges that we're facing right now?

You know, my my training was in public finance. And for those who don't do academics and especially PhD public finance, that field is devoted to very clever policies to correct the failings of markets. And so the classic example is you get a little pollution that cost that's not incorporated into the cost structure of the firm. Let's put a little tax on them for every bit of pollution they do. Now suddenly they recognize the full cost of their activities, and the market works to produce efficient outcomes.

There are all sorts of clever little fixes, but the presumption of that field is that markets are there and they're valuable, but they don't work very well, and you gotta clean them up all the time. So I taught for three years at Columbia. Had a real crisis of faith because I thought my students don't listen to me in a class. I write papers for these obscure journals. No one cares.

And so I went home, and that meant Princeton. I was a visiting professor. And while I was there, my, mentors, Harvey Rosen and John Taylor, went to the George h w Bush administration. I went to the Council of Economic Advisors where I was a senior staff economist. And to my amazement, in a Republican administration, people had all sorts of great ideas about how they were gonna intervene and tell people what to do and run their economic lives.

And and I was just spend my whole day screaming, don't touch that. Don't touch this. That'll be fine. Don't worry about that. Market the incentives are all just good.

I went from sort of this highly interventionist trained economist to the walking version of free to choose by Milton Friedman. It was it was it was unbelievable. But it really did wake me up to the fact that people can make mistakes and do make mistakes. And they make well intentioned mistakes, and they make ill intentioned mistakes. They make ill informed mistakes.

Mistakes are a part of life. And I would like to minimize the ability of of people in the government to broadly impose their their wishes on people and make mistakes in the process and make their lives worse off. So it's a personal economic freedom kind of view that's driven not by an ideology as much as my experience and the fact that we're all operating with insufficient information. So in those circumstances, I don't wanna overreach and and impose too much on other people through the use of federal policies. So I'm a much more small government person than a lot of my colleagues.

So as a small government person looking at what both sides of the aisle have done in terms of, you know, deficit spending over the last twenty years, it may be a little bit of a time for a wilderness. But I think your time is coming back because I do I do think there's something going on, and I wanna touch on that with you and get your perspective. I was a corporate lawyer for many years. I also run a restructuring firm, and we work with VCs and banks and otherwise to kind of restructure and clean up balance sheets. And I always refer to myself as a little bit of a canary in the coal mine because as the economy starts to change and we're working up a bell curve in terms of liquidity tightening up, my phone rings more, and it has been ringing more.

I bet. So from your perspective, what do you think is causing this unease that people are starting to feel? So two things on that. One, to go back to the question you just asked me, this is an example of where I think the government goes wrong. The government, meaning, you know, your congress, your agencies, they they intervene.

And once they do that, they can't let it fail. And one of the things we have done well as a nation is let things fail, restructure them, put the capital and the labor to a better use, and become more productive in the process. And the government gets in the way of literally your business and and that process on a regular basis. And I think that's to our long run detriment. So I try to keep them out of as many things as I can for that reason.

What's going on right now? Well, we had the the era of free money. You know? You get the the financial crisis, 2007, 2008, quantitative easing. The Fed just poured money out there in ways that were unprecedented, come out of it with a sluggish recovery that goes on for a long time.

Get a couple of good years, but nothing really to write home about in in, you know, seventeen, eighteen, nineteen, and then the pandemic hits. And now the the error of free money is over, and there are a lot of people who don't know how to operate their businesses on positive real interest rates. I mean, they're like, Silicon Valley Bank's probably the worst bank in history because they didn't do the most basic banking function, which is manage risk when you borrow short and lend long. I mean, you have to manage the maturity risk. They just didn't do it.

Term risk was everywhere. So what I think what you're seeing is people who are out of their depth. They don't know how to run run things in this environment, and this environment is here. And that's a good thing, I I think. I think the aberration was that period after the great recession, the financial crisis.

I I don't have a clean glib explanation for what all went on there, but we are now back to, having to pay attention to some fundamentals and and have businesses that can manage risk. So let me push back on that because there's a part of me that would hope you're right. But you also said that once the government starts down this path, it can't essentially let people fail. Yeah. And so we are seeing this tightening of liquidity.

Whether or not it's commercial that the shoe falls or apartments or technology, won't the Fed rush to monetize again the debt and to quantitatively ease and and buy its own debt and essentially try to bring interest rates down if we head into a deep recession? Why wouldn't they try the same toolkits that they tried before? You're right about that. But the big if there was if we went into a deep recession. And I I don't actually see why we should.

You know, if if you take care of your knitting, you're gonna have some smaller scale failures. Certainly, we've seen some in in the midsized banks. We might see a couple more. Commercial real estate is on on my list. I think it's on everybody's list.

I think the the residential real estate crisis is over because it's already in a a deep recession. Nowhere to go. It's gonna have to go up. So if the Fed manages through those risks and we face a a small recession, I don't see them using the full toolkit. We will have I I think I I'm I'm concerned about a recession.

I'll be honest about that. I I think the risks are are there. But, weirdly, everything has gone back to the twentieth century. 20 century recessions were income events. Income slowed down.

People got laid off. They went on new y, partially replaced their income. You know, eventually, you you needed, to replace things, and they hire the worker back, and you got an upward virtuous cycle. And then out of nowhere, you know, the world throws a curveball, and we got a big equity bubble and the .com bubble, produced a a relatively minor recession. Then we got a huge debt bubble, crushed the economy.

Those were financial market events that that imposed themselves on Main Street. If we have a recession now, it's gonna be a good old fashioned the Fed tightened to fight inflation. Interest rates got high. Income flows slowed down. Real disposable income has slowed down a lot.

Households have to pull back. You know? We're gonna know how to deal with this. We're not gonna have to pull out all the stops and guess like they were in 2007, 2008. That's for sure.

So in other words, your belief is that even though there is a lot of debt out there, that the typical bankruptcy restructuring, out of court restructurings, foreclosures, that those tools will come back into vogue and we can use those, but we're not gonna have a systemic failing in the financial sector. I don't think so. So I don't think see any reason to socialize those debts. I think we're gonna let the the private sector work them out and, you know, sort of the losses will be allocated and we'll move on. Interesting.

Okay. So zooming out a little in terms of the economics, one of the things that we struggled with was that we weren't growing very well. And, you know, Ben Bernanke, you know, saw the Tea Party movement. He saw the kind of inability to kind of get the economy going. And so he, in a sense, you know, supercharged the economy with these asset bubbles and so forth.

That's right. What do we do now in terms of, again, letting the economy grow and get back into a more, you know, sustained path of growth? So first of all, some facts for the listeners. In the twentieth centuries, 1960 to 2000, GDP per capita, which is a crude measure of income per person, grew in an average annual rate of 2.4%. And that doesn't mean much to anyone except that that meant the standard of living doubles every twenty nine years.

Now it's growing at 1.4% here. Welcome to the twenty first century, and that means the standard moving doubles every fifty six years. And so there is this palpable sense people have that access to the American dream is disappearing over the horizon. What changed? Well, among the things that we did, is learn some lessons in the sixties and seventies about too much aggressive micromanaging the economy from DC, this sort of concede economists had that they could manage the business cycle, raise taxes, cut spending, do the reverse.

It failed miserably. And so in the eighties and nineties, especially, we tasked fiscal policy with long run growth, have disciplined budgets, set the budgets to support the trend growth, and let the Fed manage, short run fluctuations. And then for reasons that probably have to do with poor advice since I was at the White House, we got away from that. And we did discretionary fiscal policy in 2001, 02/2003, 2005. We sent checks in 2008.

We did the recovery act. We had this very activist fiscal policy again for some and guess what? It didn't work. Didn't work in the sixties and seventies. Didn't work again.

So I would hope that we're coming into a a moment where we get out of that business. We say, alright. We have some structural problems that hurt our growth. They're called Social Security, Medicare, the growth of mandatory spending. We gotta have a tax system, the sports growth, get the spending in line with it, and off we go.

If so, I think we'll do better. And I think the Fed will not be in the position that Ben Bernanke was in, which is to say, I have to, by myself, produce growth, and he couldn't. The Fed doesn't have enough tools to do that. It's great at slowing the economy down. It's terrible to push it forward.

And all we got was inflation. We got asset bubbles originally. Now we have consumer price inflation. Learn the lesson. And do you think I mean, when you talk about learning the lesson, we had Chris Leonard on the show who talked about the lords of easy money, and kind of his entire thesis in o '7 and o eight was that we staved off this catastrophe in the moment by printing money and using quantitative easing.

But we created these asset bubbles, housing skyrocketed health care, higher ed, for example. You know, how do we now correct those things? I mean, does the general population understand that this wave of easing money actually actually was inflation? We and that we've been gaslighting people a little by not talking about asset inflation? So I don't think so.

I mean, I I would be shocked if the general public had the opportunity to learn that lesson. They just don't see enough of those examples. But they did get a good dose of forty year high consumer price inflation, and it it made them very cognizant of the limits of the government to deliver the a good life to them. And I think that's a a lesson well learned. Certainly, a lesson I learned in my youth that, you know, seventies and ages when I was trained, inflation was the the consumer price inflation was the thing we worried the most about.

It made you, you know, respectful of the limits of what the government could just deliver automatically. I think people have that again, and they're gonna be a a little more practical when they sort of start looking at these different issues. So, for example, one of the things that went away quickly, believe, in in less than four years was the entire drive on the left for universal coverage, single payer, Medicare for all. It's all gone. Like, no one is talking like that anymore.

They're talking about the cost of health care. They're talking about the inflation component. Right? They this is now permeated how people think about the economy. So I know you're not big on wealth taxes, and we've joked around about, you know, people over $10,000 have benefited from asset inflation, so we should you know, some people say, hey.

Have a wealth tax. But we do have this income inequality in the Western world. I mean, Piketty's talked about it and otherwise. Do you think it just works itself out, or do we need to do things from a progressive tax perspective or other things to kind of make the system feel more fair to the middle class? So I I am less concerned about this than a lot of people.

That may not be a virtue. But, you know, to my eye, what we really saw was in the eighties and into the nineties, we saw the labor income distribution just widen. The bottom dropped in real terms. The top went up. In the early two thousands, the bottom stopped dropping, and the top kept going up.

That doesn't bother me. Having more rich people doesn't bother me. It bothers some people, but it doesn't bother me. I worry about the bottom end. I worry about poverty and and people who are not economically self sufficient, and I think we're spending too little time and attention on that issue.

That's a crucial issue. Our k to 12 school system is not delivering an education that's good enough for everyone to be assured of being economic self sufficient. I think that's an enormous national failure. So that's what worries on me. I'm less worried about the top end.

I know my colleagues on the other side of the aisle, very worried about the top end. Gotta make these people poorer somehow. My not interested in making people poor. I'm interested in making sure everyone has the access to be able to participate in the in the economy and be be self sufficient. And that makes sense.

But in terms of allocating resources, if you wanna spend more money, for instance, on, you know, high school and pre k and all these other things. I mean, do you think it is a spending problem as opposed to a tax I mean, a a a revenue problem? And what's your perspective in terms of I do. I mean, so our budget problems are are really quite simple. We're going to, spend $72,000,000,000,000 over the next ten years.

21 of it's gonna be annual decisions of Congress. That's now a minority piece of what Congress does. The remaining 51 is going to be, quote, mandatory spending. That's budget talk for entitlements. And of that, 36 is Social Security and Medicare.

That's where the money is, period. It's one thing that that they're big, but the more substantial problem is they're growing faster than everything else. Social Security grows at five and a half percent per year. Medicare grows at 7% per year. Revenues are gonna grow at roughly the rate of the nominal economy.

That's gonna be four or five, whatever we we end up at. So they're just widening all the time. Now you can raise taxes, and we're gonna raise taxes, that's my guess. But that just is a onetime thing. Then you go back to the phenomenon where the spending outstrips the revenue as far as the eye can see, and you're we we're back to the original problem.

You know, I did some calculations that said, supposed we'd raise the payroll tax enough to close the gap of Social Security. We did it right now. And then we just let it run. Do you know how much time we buy? One year, three months until we're back to having the same cash flow gap in Social Security.

So you have to somehow bring down the growth rate of Social Security and Medicare closer to the rate of growth of the economy. That's the only sustainable fix. My preferred way to do that is, in fact, to take away the benefits of rich people. So I don't understand why the other side is so eager to tax the rich people, nor do I understand why we won't just say, you know, I don't think Elon Musk needs all his Social Security. Right.

I just I think he'll make it. I do. So I think we need to get serious about those things, and and make those programs, which are important programs that most people are gonna rely on, sustainable over the long term. But is it with our debt word is right now and with the interest on the debt where it is, is it gonna take some type of a crisis? I mean, you talk about that it feels like this is manageable, that we're gonna have a shallow recession, that we're not gonna have to print money again, so to speak.

And yet, if we don't have a crisis, how are we gonna get the political will to make the changes you're talking about? It's the it's a great question and one that I don't have a superb answer to because in the twenty first century, we have failed. We have not ever stabilized the rising debt. It's gone up. Absolutely, it's gone up relative to the economy.

We haven't shown the political wherewithal to do it. So what fixes that? Well, one is education and leadership. You know, when I look at twenty first century presidents remember, I worked for George w Bush and then Barack Obama, Donald Trump, Joe Biden. None of them stood up and said to the American people, you know, we have a problem, and it's the federal budget, and and it's a threat to you and your children, and we need to to get it together, and I have some ideas about how to do that.

No. If you look at the budgets of the Bush administration, they were we have to win the the war against terror at all costs. That's what those budgets said. The Obama administration, all they ever said about the budget was as long as the rich pay their fair share, we're good. Trump administration, they said zero.

Biden administration came in and acted as if there was free money. Like, we're just gonna do all these big new programs, and don't worry about it. They hadn't fixed the old ones, then they were off making so if you're the average American, nobody who's important has told you there's a problem, so why would you expect something to change? More to the point, if your congressman comes home to a town hall and says, hey. You know what I'd like to do?

I'd like to reform Social Security. And he's done. Like, you know, gone. So there has to be some public education that supports efforts to to sort of make changes to these things, to make them sustainable. And the reason I think that has a chance is, number one, we're about to have a series of reminders that these things matter.

The debt ceiling goes away January 1. New congress, new president. January 1, the treasury is doing extraordinary measures trying to keep us under that. We've seen that movie. That's a wake up call.

People don't react well. Good chance we'll have a unified government that's trying to change the way the government works when we might have a threat of a government shutdown. That always wakes people up. Task, Cuts, and Jobs Act sunsets next year. So all of the task code is essentially up for grabs.

Those should be moments where people start talking about, well, what do we want? How much do we want taxes? How much do we want spending? How do we get this together? So there is a chance for some education.

That's one way for this to happen. Second way for it to happen, people can't get what they want out of their government. Like, if you're my kids, they talk to me all the time about how, you know, like my my daughter. I I like a a paid parental leave program. A lot of people would.

You hear that a lot. That's not a crazy idea. There's no money. It's all spoken for by something that was designed in 1965. And so if you can't get what you want out of your federal government, you're gonna get some real political discontent, and it's gonna mean we gotta change some of these things to to deliver it.

That's a second route. And then the third is crisis. My hope is to not have the third that we can get there through, you know, Route 1 or Route 2. Yeah. One of the reasons, again, we do the show and we talk about these things is for exactly that point.

That prophetically or otherwise, let's deal with these issues before they become crises. And none of us know exactly what's gonna happen, but let let's just assume for sake of argument that Trump were to get reelected. He is not a fiscal conservative. Oh, no. So at what point do the bond vigilantes step in and say, hey.

We're gonna not let lower long term yields go up. We saw a little bit about, I think, that in Britain about a year ago. We did. What's your perspective on our ability to continue to have a a loose fiscal policy depending on the administration? And at what point do the bond vigilantes step in and do long term rates not cooperate?

So our problem in that regard, if you want the the bond market to be the discipline as it very much was in the nineties, is we're the best looking horse in the global glue factory. And, you know, we have our problems. I'm willing to to enumerate them. But when trouble hits, money runs to The US. It's still the the safe haven.

And so it's hard to get much bond market discipline when when you're the the place they're counting on. So I I don't think that's really super likely. But the lesson from Britain, which is on the other side of this this debate, is that was a a sort of shocking and incomplete vision. It was just sort of a shock therapy thing, and and the market said, no. You give me a plan that adds up and I can trust, maybe, but not this.

And we haven't given markets a plan that adds up where they can trust for a while. And we're starting to see at the edges warnings, downgrades, negative watches, things that are are preludes to that kind of market reaction. It will be a mistake to ignore that. So when you look at the housing crisis back in o seven and o eight, it it from my recollection, and a lot of the financial turmoil started in The U. S, and then it spread to the rest of the world.

When you look at what's going on today with China, when you look at what's going on with Japan, when you look at what's going on in Europe and so forth, is there some indication that what's going on in the rest of the world is gonna spill over to The US? Well, we're not insulated entirely, so you can't it would be foolish to ignore, particularly, the the the sort of Chinese bad debt problem, which is it's there. It's the question is, as it was true back in 07/00/2008, what piece of this do I own? And if I can't answer that question, I do have a problem. And I, quite frankly, would think that'd be worth worrying about right now.

Do you somehow implicitly own a big chunk of Chinese risk that you're not pricing? That is what went on with the the financial crisis. The remarkable thing about the financial crisis was that there were housing bubbles across the globe. I mean, that wasn't I'm always bemused when people talk about, oh, it was The US regulators or The US this. It it was everywhere.

So, no, those US specific explanations don't explain it. Right. Different monetary policies. We had different regulatory policies. We had asset bubbles across the globe.

And when they all pop simultaneously, it was very ugly. There's no question. I don't think we're quite in a this the same position, but, you know, I I hope one of the lessons is don't go to sleep at the switch. You know, pay attention to this. And, if those asset bubbles start to to look honest, you you need to start getting in there and and addressing them.

Stay on that theme because, again, the the world does seem to be so interconnected. When you look at what's going on in China right now, where they're really sitting down and they're this week, they're really talking about different things they can do. Nobody seems to have a quick fix to the amount of debt. For whatever reason, it got to this certain level where it's like the party is a little bit over. And I'm wondering, like, in The US, one of the things I noticed was real estate because there are cap rates.

And so things can go to the moon, except when you have cap rates and you have to be able to finance that real estate purchase, there is a certain limit to when the numbers just don't make sense. And it seems like we got to that point in The US. Is part of what's going on in China and Japan a precursor to what could happen here where, you know, there just is a limit to how much debt you can take on? I think the problem in China, especially in Japan, is that they're not relying on market discipline. They're, in fact, explicitly overriding it.

And, you know, regional governments in China were not the lender of last year. They were the lender of first resort. They were the aggressive commercial builder of first resort, and they built enormous swaths of empty buildings. So those are just bad debts that are sitting out there. You know, you think you don't own any of that.

I think I don't own any of that. But maybe I own a a company that's got a fairly heavy concentration in in Vietnam. And, you know, there's a a Chinese interest in that, the local company that I don't really know about. And when China goes down, that company goes down. And and suddenly, you do own some of that risk.

And so it it's worth noting that there's a big risk in the China economy. China is an enormous economic risk over the next thirty, forty years because number one, they have the near term problems, this big debt bubble. Number two, their demography is so bad, they will be half their current population in fifty years. I mean, that's not going to be a pretty transition. I don't see any way to get around that.

Again, trying new issues and trying to understand different perspectives on things. With a fiat currency where it's not backed by gold and where different countries can run kind of their own monetary policy Yep. If everybody's united, like, when they were in o eight and otherwise the world got together and we flooded the world with all this cash. Everyone was essentially cooperating. When you look at what's going on in Kenya, when you look at what's going on in the world right now with belts and roads and the whole issue with liquidity, is it also a challenge for the Fed when we're all not pulling in the same direction in terms of keeping the country and the world going in the right direction?

I don't think the Fed should try to keep the world going in the right direction. Right. And that would be a mistake. In a world that does have this sort of decentralized feature where you're not on the same policy agenda, What you wanna do first and foremost is take care of business on the home front, take care of fundamentals. So have a fiscal policy that adds up, ours doesn't, generates good solid productivity growth, allows the standard of living real wages to rise, and then you will have international shocks that are gonna be translated through the currency and financial markets, but the underlying real economy is is in good shape, and you can absorb them.

You'll have the resources to do so on a on a regular basis. If you don't take care take care of the basics at home, then you're exposed. You have a big problem. That's what I think you should do first and foremost. So when, you know, trending little labels like America First come up, that's what I think of as an America First policy.

Like, take taking care of your business so you are robustly insured against some of these shocks. You can then go talk to people and, you know, your your government does this all the time. Sit sits down with the Japans and the the Chinas and the emerging markets folks and and all these different international foreign and say, look. There's not much we can do for you unless you take care of some of your own work here. And then maybe we can give you some loans to bridge some things.

And the global community actually does a lot of that, and that's hopeful. But you can't fool mother nature. Either the underlying real economy is growing or it's not. So in terms of growth, I think you talked recently about how corporate taxes really attacks on labor. And if those taxes, expenditures are passed on to labor, how do you see us stimulating growth and protecting workers?

And who who have you seen out there do that successfully? Well, believe it or not, we've we are more successful than most developed countries by far. And so I just hope that we don't unlearn some some recent lessons. So the 2017 tax act did a lot of things, but the things that I think are absolutely clearly successful are the corporate reforms. They're not perfect.

I could make them better. But in moving the rate down to from 35 to 21, we stopped losing headquarters. Like, we were losing about five headquarters a year in the five years leading up to the 17 act. We haven't lost a single headquarters since, not one. And that's attributed to the fact that this is now a tax competitive place to do business.

And we also tilted the playing field toward investing in The US as opposed to abroad, having your IP in The US. All of that has been enormously successful, and it it benefits US workers in the end. Because if the the headquarters is here, then the manufacturer will be here, and the R and D will be here, and, broadly, the ecosystem will be supported in The US. That's great. I mean, I I'm Irish I'm of Irish descent, but I'm not a build a better Ireland guy.

Like, let's build a better US. And that's that's the key. And so I I hope people understand that it's easy to to demagogue big firms. It's easy to be a hater. But those tax policies in the end are about keeping our most successful firms here with American workers and being competitive around the globe when they sell their products.

That's what you wanna do. It makes sense. So we, you know, with my restructuring practice, work a lot in the financial sector, and we work with a lot of banks, a lot of non banks, the VC world. When you think of regulation, the financial sector is fundamentally different than the EPA and energy, who you cite is contributing to much of the regulatory burden. Right.

How do you see it in evolving? So I think the, you know, the financial services industry has some, you know, really good regulations that no one should dispute. I mean, you need the presence of, regulators for safety and soundness and for consumer protection and investor protection. That that those are essential elements of of a financial services regulatory environment. But we can get overreach.

I mean and I don't know if you remember the Volcker Rule. The Volcker Rule never made any sense. It was meant to address the idea of risky bets by firms on their own book, and that wasn't anything to do with the crisis. I mean, it was it not a problem that needed fixing, and it was enormously expensive. And then there were the the blood diamonds regulations that that were in the financial sector that didn't make any sense.

So you can't overreach. There's no question about it. Right now, we're part of this Basel framework, and the Fed announced a way to implement the final part of the the Basel agreement in a way that made no sense and put all of our our largest, banks at a global disadvantage. And, properly, there was a lot of discontent about it, and they're and I think they're listening. I mean, that that's good.

So it is easier to point to just ridiculous regs in the EPA interior energy world. Financial regs, it's just a question, do you go over the line too far? You gotta pull it back some. I mean, that's always the the hard thing. And and if you don't do it every day, it's it's hard to evaluate the arguments.

Is that right or wrong? I don't know. But I I think, by and large, we've we've done pretty well. We have some clear examples of overreach, and that's gonna be a constant battle. In terms of simulating growth, I mean, we've talked about lower taxes.

We've talked about less regulation, Yet there's a lot of anger from young people on the left and otherwise who feel like with, again, housing being so expensive, with health care being so expensive, education and so forth, how do we explain to them and get them buying into the this environment where because, you know, traditional conservatives don't really exist. We've got we've got a pretty active right and left right now in terms of the government's role and stuff. But how do you give hope to young people who, for instance, were looking to Bernie Sanders to taxing the rich and redistributing money? How do you give young people faith in the system that they feel that they've been locked out on? And, by the way, look at the boomers.

Look at what's going on with older people holding on to power too long. How do we inspire them so that they feel that they're they can live better than their parents? So among the things you can do is give them the same opportunity their parents had. And so one of the reasons they feel like the system's locked against them is too much of it runs through DC and the federal government. So Bernie Sanders holds the key to to affluence, and please have it be turned toward me.

Whereas, you know, my goal is to keep that to a minimum and have it just be focused on the poverty programs. And, you know, it isn't how much you raise in taxes. It's how you raise it. When you have a tax system, you shape the sort of returns to different activities, and I wanna have a tax system that's as neutral as possible. And where it has to make calls, it calls in favor of savings investment innovation and calls against excessive consumption.

That's me. You know, you can raise a bigger percentage of GDP, 18 versus 20. I think, you know, we're we're gonna go north. I I don't see any way around that. Raise it well.

And in the process, let your average young person who wants to have some freedom to pursue their dreams the freedom to pursue their dreams, financially and otherwise. The other thing that goes on then, and this this is just a a sort of tragedy of of short term thinking. Things are expensive. So what do you do? You you give people more money to pay for them.

So the problem with when you have high prices is inadequate supply, and you create more demand, and thus make the the existing supply even more inadequate. So you subsidize it again. Now it's more inadequate, and that approach never works. So then politicians get frustrated and they impose, price controls, and they keep the prices down. Well, lower prices have never reduced demand or raised supply in in their entire history, and so that fails as well.

So at some point, you just gotta let market mechanisms work and and get people making more of the stuff that we need. Housing's classic example, which is housing supply is too small, and everyone immediately runs around with subsidies for demand. And, no, we need to to actually allow the land use restrictions to be reduced and, you know, get the the regulatory environment that surrounds the average American home is enormous. Let's take care of everything we can to build more homes. And to get some productivity growth, I mean, one of the amazing things there've been a couple amazing presentations I've seen this recently.

There has been zero productivity growth in construction in a hundred years. We still go to the site, pour the mortar, put in the foundation, build the walls. It's it's the same, and it's expensive, and we have to do better. Yeah. I mean, housing is a great one, and it's you know, we we built some ADUs in Los Angeles, and we thought it was gonna take a year, and it took two years because of the permitting.

And don't get me started in terms of the craziness there. There definitely is a challenge because people wanna live where other people are already living. Yes. And the problem is people wanna pull up the ladder. They don't wanna change their zoning.

They don't want traffic to get worse. It's hard to go back and build mass transit now a hundred years later when we've got all these roads and so forth. And so it really I think it is a real challenge. And in California, especially in the big cities, we are really, really struggling with it. Any any thoughts in terms of how we can address that?

I think you have to just acknowledge greater density. You're gonna have to to live with that and build that density cheaply. I'm not an expert on this, so I I'm I'm now way out over my skis, but there there are these examples around the globe of manufactured housing. Ever that's a a term people don't like. But but literally, build it floor by floor in a factory and get all the productivity growth that modern construction can get in a factory.

We've got lots of productivity in factories, and then cart it to the site and stack it up. And it's way cheaper to build. And it's not LEGO buildings. They're beautiful buildings. They're just designed and built in a different way.

Yeah. You know, it's interesting. The scenario I know a little bit about, and I can tell you one of the challenges is that if I'm a factory and I'm building these homes, one of the things is you have you know, you're staffing up, you're building these homes, and then there has to be a buyer form. Right. And the challenge is because the permitting process is so inefficient and we don't know when the permits are gonna get granted that you've literally got a situation where from a you know, it could be a year or it could be two years.

And so when you're doing just in time inventory or manufacturing, it's very, very hard to balance that. And I've seen some of these manufacturing companies go out of business or really have cash flow problems because they can't balance the manufacturing timetable with when the buyers are gonna be ready to buy those products. Yeah. No. I as I said, you've now exhausted my expertise in the site.

I should say no more. No. But it's but you're you're right. I mean, it's a natural thing that with, you know, three d printing and otherwise, there is no question that a lot of this can be made much, much more efficient. So, again, going back to lack of regulation, but but having intelligent regulation Yeah.

One of the things that I asked Larry Summers about was what kind of exposure could there be to these kind of non banks? And one of the things that I see that's different from o seven and o eight is when the.com's blooping o one, and then when in o seven and o eight companies shut down. If you didn't have real earnings and you didn't have an ability to pay off your debt, you didn't necessarily have an SVB loan or a First Republic loan. What I'm seeing now is that, essentially, every company, any individual that went out and started a business was able to get an additional 5 or $10,000,000 of debt to layer in on top of their equity. And so some of it came from banks, but then there's this whole new industry that was created called non banks where you've got hundreds of these institutions that went out and built these diversified portfolios.

They lent this money out. And I don't know that we're tracking it, but it appears to me at least to be a much bigger piece of the puzzle than people realize. And some of these non banks borrowed money from the too big to fail banks. And so as we're looking at our liquidity and our our landscape, do you have any feelings about the role of non banks? So I do.

I think the .com bubble is is a really instructive historical episode. The wealth loss in the .com bubble and the wealth loss in the housing bubble are the same number. It's like peak trough $7,000,000,000,000. Poof. Gone.

The .com bubble and equity bubble where people ate their own losses, they put their money in, they didn't get anything back, produced a modest recession 2001, 2002. The .com bubble was was tiny. The housing bubble and the and the general credit bubble and the great, you know, financial crisis, that was an enormous cataclysm. So as long as these nonbanks are playing with their investors' money, I don't care. They can all go broke and then they go away, and that's that's life, and I don't I don't lose any sleep over that.

They start playing with leverage, then we have to watch very, very carefully. And I don't think we know right now how levered they are. That's the concern. Yeah. That's my concern as well.

Because, again, when I go to these conferences and I talk to these non banks, they'll talk about how they have a diversified portfolio. And, you know, I'll be like, oh, well, is it all equity? And the answer is no. We've been able to go out and leverage our portfolio by borrowing money because we've got these companies that are paying interest Right. Let alone the interest is being paid with equity as opposed to earnings.

But we we have earnings, and we've been able to lever up by going out and and doing this. And when I've when I've liquidated or shut down some of these companies, I mean, I can see these non banks starting to take hits. But, again, that old expression, how do you go bankrupt very slowly and then all at once? We also had a guy named Richard Duncan on the podcast a few years ago, and he talks about creditism, and he talks about wealth creation. And I think his number is, you know, since COVID, that the wealth of Americans has gone up over $60,000,000,000,000.

And you talk about a wealth effect. And so, again, you talked about o one, you talked about o seven. What concerns me is that, you know, there's a whole generation of people that haven't lived through these corrections you're talking about. And whether or not it's Robinhood or other apps that encourage, you know, younger people to put their money into the market and otherwise, do you think we are at risk of this kind of bubble or this these balloons coming down and having this reverse multiplier effect? I was very concerned in 2001.

I mean, beginning in 2020. Sorry. 2021. So I in 2020, you began to see this. Right?

This sort of enormous Fed stimulus, normal fiscal stimulus, and then people who had no idea what they were doing, getting a Robinhood app and buying some crypto or maybe some options on crypto. Why not? I mean, that's fun. And we saw crypto, housing, equities. You started looking around, and it looked all like it was blowing up too fast and getting frothy in the I really was worried about that.

When the Fed started tightening, by and large, we got a a correction out of a lot of that. I think the crypto market is by and large sorted itself into firms that are viable in a lot of places that aren't. Housing market, I I don't think people are deeply worried about a housing bubble right now. The prices of existing homes are up because there's very little supply, but that's not the the huge demand bubble we had before. Equities, I still have you know, I I I'm not an equity expert, but, you know, the AI thing feels like the .com bubble to me.

You know? It's just everybody's diving in. But if you put AI in front of it, dive in, get it. It's all good. So I am I'm still watching that one.

But I I think we dodged a real run up, there. And and we're we're we're gonna as I said before, I think we're gonna see some losses. I still think the risk of a recession a mild recession is very real even this year, and, you know, that will involve working out some, failed properties and and companies. That, I think, is something that we need to learn as part of what goes on in life, and and we just go through it. If we keep rushing in to save everybody, we will ultimately fail in a much bigger way.

So as a guy who's not for, you know, too much government intervention, when you look at things like the AI chips race right now and you look at the desire to bring back manufacturing here and the shortage of ammunition for Ukraine and otherwise, and I and I see I see you shaking your head right now. Yeah. What do we do from an industrial policy, if anything, to essentially compete with China and the rest of the world when it comes to, you know, EV and chips and so forth? So I have zero fear that we can't compete with China on EVs or anything else. I worry a lot about people in Washington deciding who gets money, and the Chips Act is just walking around money for politicians.

There's nothing about Taiwan that your average business couldn't take one look at and say, you know, that's not a very safe place. China could show up anytime. It could be a natural disaster. We gotta make sure we have splashed in more than one location. There's lots of private sector incentives to diversify.

All the CHIPS Act did was get into a bidding war with Germany and other countries about who's gonna get these guys, and we we didn't improve anything in the process. It started out with a legitimate observation that there was probably 7 or $8,000,000,000 worth of military chips that should be, produced in The United States for security reasons. I I wholeheartedly endorse that. The rest, these guys had enough money in their balance sheets. Why are we buying them chips fabs?

I mean, it's crazy. So I'm not a big fan of that. Industrial policies have never worked out for The US. We are it's not something that that we should be getting in the business of doing. And, you know, I think private sector folks learned a lot in the pandemic about their own supply chains.

And in the end, they're the only people who can fix their supply chains, and they will because they can make money if they do. You know, the idea that the government's gonna fix everyone's supply chain is is, I think, a fantasy. That that's not something it's it's capable of doing. So I think we're at a bad moment now with this sort of heavy emphasis on chips and industrial policy and protectionism. And I understand that we've been through a lot of crises.

In twenty five years, we've been through, you know, terrorist attack, financial crisis, pandemic, makes people want to feel very secure. And I think both I think we've got a bit of an overreaction on our hands. Makes sense. And then you also let's let's go back to kind of this financial crisis inquiry commission that I believe was in 2009. And how did you find yourself there, and how was that experience for you?

I found myself there because Mitch McConnell said, Doug, if you don't do this, you're out of the Republican party. So I said, sure. I'd like to do that. That's great. That's how I did that.

And it was a miserable experience. I think it was a complete failure. It was the stated task of that commission to produce for the American people a comprehensive and understandable explanation for what they had been through, and it did not. You you haven't heard one. Right?

Mean, it didn't. It was torn apart from day one by partisan divisions and agendas that had nothing to do with, trying to understand what went on in the crisis. I think the staff did an enormous amount of really good work. If people care about details, you can go and read the report and and learn a lot. But in terms of its real job, which is, hey, American people, here's here's the deal.

This is what happened and and why. I don't think it succeeded at all, and I'm embarrassed by that. And And I you know, and and it was clear sometimes. I I can remember being in one of the public hearings and, you know, people were inquiring and, you know, grilling some witness, and I finally just said, look. I I I declined to inquire because we've embarrassed ourselves enough, and we just stopped.

You know, we we weren't asking questions about what happened. We were asking questions about who we could blame. So I know you're not a big fan of a lot of regulation, but in terms of smart regulation, how do you think Glass Steagall and getting rid of Glass Steagall, if it all fit into this? And from your perspective, if you were able to give us an explanation, what would it be in terms of what really went wrong then? So I don't think Glass Steagall had a lot to do with it, quite frankly.

I did write along with Keith Hennessy and Bill Thomas a dissent that's that you can read. And I think the the key is that a lot had to go wrong simultaneously. We we identified sort of 10 factors, and that's what big crises are. They're accumulation of things that that that you didn't think mattered, but in the end, they did add up. And, you know, some of it really was poor regulation.

Like, you know, the SEC, as it turns out, is a really terrible safety and soundness regulator. That's not what it does. It was there for investor protection, and those firms were a mess and not transparent. And so it wasn't a case of too little regulation. There was too little, too much, and and poor regulation.

All all of the above were involved. It's also true that monetary policy contributed to it. The sort of steady, predictable interest rate policies that people could easily take bets on, and they did, and big bets. And, you know, there there were a lot of things that contributed to that. Fannie and Freddie, I think, you know, were are just really just enormous failures of public policy.

And they're the proof is they remain on the government's books to this day. I mean, we really have not sorted out the housing market at all, in my view. Sort of shocking. I never would have forecast that. So there were there were a lot of things that went wrong.

I mean, there there really were. But, you know, as I said earlier, one of the most amazing things about it was we invented a system. Fannie and Freddie were part of a system that was meant to geographically diversify housing risk. So if you lived in a in a small farm town and the crops failed, everybody didn't fail to make the mortgage payment. The bank didn't collapse.

You could sell that off and and diversify it. And in the process, we created a system so opaque, no one knew how much housing risk they were holding. And a lot of them found out in just, you know, completely bewildered ways. And there was some incredibly just terrible management. I mean, we literally had a hearing where the AIG chief risk officer, who was the chief financial officer, said he did not know that the contracts they had signed with Goldman would require them to put up cash if the underlying assets fell in value.

You're supposed to be the the risk officer, and you don't know who your contracts require in terms of cash? I mean, I I wanted to cry. I I'm the guy who defends the right of companies to pay their executives how much however much they want. That was a bad day. Yeah.

So, you know, there were a lot of things that went on in that. Well, I hope that if we do have a mini crisis or a bigger crisis that the financial crisis inquiry commission of twenty twenty four, twenty twenty five gets it right because Yes. It really again, and I I hope I'm wrong, but in the same way in o seven and o eight, you could just feel this frothiness. Yeah. When I go to these bank conferences and whether or not it's commercial or it's the trillion dollars of plus to variable rate apartment loans or, again, private equity firms that have these zombie companies now that are not profitable, but they've kinda kept on their books, It just seems like there's an awful lot of debt out there that has been put on these kind of balance sheets, kind of off books, so to speak, and everybody's kind of hoping and praying that when interest rates go down, all this stuff is gonna get refinanced.

And my concern is is that because we didn't really do what you were talking about in o nine and really, really talking this through and working these through, that essentially, by doing quantitative easing and essentially creating all of this liquidity for the last fifteen years, that instead of yes. You're right. Housing doesn't seem to be Right. In this bubble, but it it seems to me at least that everything else has had this easy money. It's been syndicated.

There's risk that's been able to move to other people. And I'm just wondering if eventually it starts to collapse on itself. I think parts are going to collapse. I think, as I said before, I I don't yet see the systemic risk. Part of the reason being housing isn't in there.

We haven't really had, like, a a different way to to identify systemic risk is to find out if if real estate's involved because all the big crises have real estate at their heartbeat, at their center, historically. So I always pay attention to real estate. Commercial real estate's in this one, so I'm worried about that. Exactly. When you look at what's going on with commercial real estate in the big cities, the buildings are trading at much, much lower prices when they're trading, and rents have not yet gone down because there isn't a flood of these buildings being released.

They're selling them very, very slowly. Yeah. So, you know, it seems to me in 2526, as these people renew their leases, there's gonna have to be a real drop in $4 rents to $1 rents or $2 rents. That's gotta work its way through the economy. So I just wanna say that that that's the speech I was giving to my financial services director in 2001 and 2002, and it just hasn't happened.

And I'm I'm I'm slightly mystified by that. I'll be honest. I keep waiting for this shoe to drop. As we speak, I'm in Downtown DC. I'm on what has to be considered a a prestige block.

I'm half a block from the White House, and all the street level retail is empty. There are a gazillion tourists who are here every day, and you can't support a a a a sandwich shop? I mean, that's Yeah. That makes you wonder. Something's up.

I met a woman at a conference in Las Vegas about a year ago who had a travel lodge in was at Tennessee and basically wanted to convert it to apartments and had gone through a bankruptcy and had a loan. And it really was a two or three year process of whether or not she was getting government assistance, and then she was getting restructured this. And so it's again, how do you go bankrupt? Very slowly, you know, all at once. There's been so much liquidity out there, and there's so many opportunities to stall and, you know, to ask for equity and to try to restructure, hoping that interest rates go down.

We're in an election year. The regulators have not been putting a lot of pressure on these institutions. Right. So I I don't think we've dodged the bullet yet. I I think these things are still working their way through the system.

Could very well be. We'll have to reunite for a a a a follow-up at some point. There you go. We'll say in terms of the conduct of policy, one of the things I like about what the Fed has done is they have tried to run down the balance sheet. After the the great recession, they didn't.

Like, they had that one little attempt, and and the market freaked out, and they they backed off. I think that was a mistake. Yeah. So now, you know, the the directionally, I think we're getting much better monetary policy. Last thing I'd say, is that the need to deal with the fiscal situation is real, but often it's portrayed as green eyeshade skies with no soul.

Now that is neat, so that's fair. But that's not the only reason to deal with it. And the very particular thing that I I know right now is if you're 55 and you're planning to retire in ten years, you don't know what your Social Security benefit is gonna be because these the trust fund will come close to exhaustion. Congress will step in. They will do something, but you don't know what.

And so you can't calculate your retirement benefit. That's a terrible way to run a pension program. So the need to to to deal with this stuff is not just a international finance, global capital markets, or good governance, small government, duck hold taken. It's programs should be good for their beneficiaries. That's not good, and so it's time to fix them.

Yeah. Totally makes sense. And I also think that we've been gaslighting the American people a little bit in terms of what the true inflation rate is because your Social Security benefits don't go as far as they did. And so that that's also gonna be a challenge for retirees. I mean, if if we don't level with people that the cost of blooming has gone up as much as it has.

Yeah. It's it's time to take care of that business, I think. And that would serve everyone well. I mean, I think we'd get better economic growth, and and that's good for the future. We'd have programs that are that are gonna last.

That's good for seniors. I I think we're gonna take care of that business. Doug, thank you. This was a great, great conversation. I appreciate you coming on very timely, and I appreciate it.

My pleasure. Thank you. The POC Venture Capital Beyond is produced by CMG Advisors. If you enjoyed the conversation today and haven't yet subscribed to our show, you can find us on iTunes, Apple Podcasts, and SoundCloud. Feel free to leave a review while you are there and maybe even a five star rating.

Thanks for listening. We'll be back soon with a new episode.