State of Play: Inflation, Twitter, and Story StocksThe Prof G Show with Scott Galloway
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- 28 Jan 2021
Neil Irwin, a senior economic correspondent at The New York Times, joins Scott to discuss the economic learnings from the Trump-era, inflation, and his thoughts on the stimulus efforts. Neil is also the author of, “The Alchemists: Three Central Bankers and a World on Fire” and “How to Win in a Winner-Take-All World.” Follow him on Twitter, @Neil_Irwin.
Scott opens with why Twitter needs a new business model and details what strengths Twitter can leverage. Scott makes the case for new leadership at Twitter.
This Week’s Office Hours: Bitcoin, Amazon platform sellers, and the future of story stocks. Have a question for Scott? Email a voice recording to email@example.com.
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Episode 46, The Atomic Number of Paladium, the number of mountains in the 46 peaks, the age at which I started experiencing erectile dysfunction, developed a home remedy for EDI's that consists of snorting a pound of Cialis or, as I like to call it, a Tuesday night.
Is that wrong? Go, go, go. Welcome to the forty six episode of the Property Show and today's episode, we speak with Neil Irwin, a senior economic correspondent at The New York Times and a best selling author with Neil. We discuss economic learnings from the Trump era, what challenges lie ahead for our economy and his thoughts on the stimulus. OK, what's happening? We have some business to discuss, you and me. So last week by Dance, the parent company of Tic-Tac announced that it was launching a payment service for Doyon.
Am I saying that correctly?
Doyon done the Chinese version of Ticktock as a way to build its presence in the country's e-commerce space. The total transaction value in the digital payment space is supposed to be seven trillion dollars this year and continues to grow at a compound annual growth rate of 12 percent. Seven trillion dollar business growing 12 percent a year. Kuching get into payments. You know, I've been talking about getting into EdTech or Keltec. Let's change that to fintech specifically payments within that, the market's largest sector, digital commerce, will register four point two trillion.
You know who shares a CEO of the payments company? One. Yes, that's right. Twitter, slow roll, nose ring, Jack Dorsey, silent retreats, vacationing in French Polynesia. I wonder if he splits his time between two archipelagos. Anyways, he's built a platform that has registered anemic growth and little to no innovation, all the while becoming a serving platter of disinformation that profits off of rage.
It ends up that engaging in misinformation or trafficking of misinformation is a bad business and but it also ends up engaging in misinformation or trafficking of misinformation. Subscale is the number three is not only it's not only bad for the Commonwealth, but it's just really fucking stupid. On the day of Twitter's IPO in 2013, the equity closed at 45 dollars per share as of market close. On Monday, the share price sat at forty seven bucks. I think it's above fifty bucks right now.
So let's say, OK, great, you're up ten percent in the last eight years versus versus what, 700 percent at Facebook? The New York Times has outperformed Twitter. The New York Times has outperformed Twitter substantially. If you could go back in time, you would say to your mom and dad, oh my God, don't invest in Twitter, invest in that high growth relative to Twitter company The New York Times see above anemic growth. Since 2013, Twitter has been outperformed by all of its competitors, including SNAP Google, the aforementioned New York Times and Facebook, compounding the company's poor return to shareholders.
Full disclosure, I'm a Twitter shareholder, which probably explains the rage in my voice.
Management's inability to address toxic content on the platform has rendered Twitter handmaid to sedition. The firm needs to jumpstart product innovation, embrace vertical content and adopt a subscription based model. The thing that gets me so fucking frustrated here is the upside. The upside is as enormous as the gross negligence demonstrated by management and the board that is put up with this bullshit. Twitter's potential is enormous. The platform serves as the circulatory system of an information age with unprecedented reach and influence, where Twitter to command the space it occupies, the company could generate commensurate financial results.
I hate that term. Comments are financial.
They could they could go big fucking bank. And I'm not talking about the ass of someone on Twitter. I'm talking about crazy shareholder appreciation here. In seven years as a public company, Twitter's stock has failed to keep pace with inflation. This is not only bad because the company does not offer a compelling product. The platform has enjoyed accelerating user growth and now boasts nearly 190 million daily active users. However, however, the company has not kept pace with its peers in turning a compelling product into a strong business.
Or put another way, the business model and management's ability to monetize this product has been incredibly anemic.
This company's strategic thinking brightens up a room by leaving it at a Pinterest snap. Facebook and Twitter. Twitter is the only company to see average revenue decrease per user since twenty eighteen. That's right.
Everyone else has figured out a way to increase the revenue on their platform per user except for the bird. The market has punished Twitter for its failures and assigns the same multiple of revenues as Menis economy. Peer Facebook, which generates nearly 20 times Twitter's revenues. So Facebook, a mature company not growing as fast a total menace to society, inviting all sorts of warranted scrutiny. And that's the multiple assigned to Twitter, Twitter, moving to a business model that does not traffic and misinformation would unlock tremendous value, as evidenced by other platforms.
For example, SNAP and Pinterest, who use their algorithms to amplify interest, not amplify anti vax ridiculous fucking cut all this bullshit about First Amendment. These platforms have no obligation of the First Amendment. The First Amendment states the government shall pass no law that inhibits. Prohibits free speech that has nothing to do with a private company, for God's sakes, they've all built algorithms to traffic and interest versus rage, except for Facebook and Twitter that have decided, I know, let's use our algorithms to become what was that Skynet.
Anyways, Twitter's growth potential, coupled with a focus on stakeholders, not just shareholders, would bring tremendous upside to shareholders.
It's no secret that the former president's behavior on the platform for the past four years turned Twitter's stock around. In fact, the stock had declined 63 percent from its IPO the day Trump took office and then accelerated 210 percent until the day of Biden's inauguration, or specifically until the day that Twitter. Fourteen hundred and forty nine of fourteen hundred and sixty days into his tenure, decided to suspend his account. And then finally, what do you know? Finally, what do you know?
They take his account down and the stock declines. Why? Because they built a business around rage and misinformation and used the president's hate, rage, invective and general bullshit to wallpaper over their lack of innovation in order to capitalize on Trump's incendiary tweets and the tidal wave of activity they generated. Management look the other way as a platform was hijacked by forces of disinformation and division.
The company tolerated an environment where false news stories were 70 percent more likely to be retweeted than true stories, propelling them across a network six times faster than true stories. That's according to a twenty eighteen MIT study co-authored by Twitter's own former chief media scientist. The company could have and should have taken steps toward resolving these problems years ago. The real issue is the company's ad based revenue model, which is corrosive to the Commonwealth and inhibits and inhibits shareholder value. Even if an ad based model did not produce the digital exhaust that were all too familiar with.
It's been done by Twitter's insufficient scale. Twitter's reach is large compared to traditional media, but dwarfed by that of Google and Facebook, who dominate digital advertising. A distant third to a duopoly is a really shitty position. Social media companies that are building ad based businesses in the shadow of Google and Facebook to Apple are doing so based on defined niches and differentiated products, at least the ones that are there succeeding. Pinterest visual discovery engine aligns its users around interest in food, fashion, crafts and other areas that drive engagement without relying on enragement.
And the platform offers creators and users the tools they need to deepen their connection with the platform and one another. Snapp's ephemeral content and emphasis on sustained personal connections insulates it from what SNAP refers to as the prioritization of morality and permanence that drives other platforms towards enragement rather than true engagement. I like that Veraldi and permanence are trying to avoid that.
Well, good for you. Good for you. Evan Spiegel, you dreamy, tall, drink a lemonade. Twitter provides no tools for users to capitalize on the conversations they've had and the connections they make on the platform. As a result, users are forced to take their conversations, ideas and businesses off the network. Sensing low hanging fruit, creator platforms, including Substract, Clubhouse and LinkedIn have moved in on monetizing value inspired and created by Twitter. The ultimate garage with its door open has been Twitter.
Immense surplus value is created on the platform that the firm currently does not capture. A subscription model would change everything. A subscription model that charges accounts with followers over a certain threshold and then scale's as follower accounts increase would immediately recast the firm as a recurring revenue firm.
What do we call that? Give me a rondeau. Let's get ready to Rundell.
Here are a few ideas and tools. The company could capitalize on personalized recommendations for accounts to follow based on user activity, including Spotify, Discover Weekly or Tick Tacs for you page improve search and thread navigation so users can more easily filter through historical Twitter activity and follow the global conversation on platform payments and expanded profile pages with greater customization than most under monetized, most valuable real estate on the Internet. The profile pages on Twitter. Sure, the company recently announced that it acquired Review, an email newsletter service which will help it compete with Substory.
However, Substory raise fifteen million in its series, a funding round led by Andreessen Horowitz and currently is the most attractive option for the top talent looking to build their individual audience via newsletters because fucking Twitter was asleep sitting on their hands or specifically sitting in French Polynesia.
Plus, we haven't seen Twitter put its roughly 800 million R&D budget to good use. They spend eight hundred million dollars, two hundred million freaking sixteen million dollars a week on R&D. Where is that shit going? Twitter feels very nineteen. Ninety nine and not a great way, that's unfair. I don't think they were around in ninety nine anyway. They feel old, they feel old and tired, old and tired. It smells like old people in. Oh.
What's that? It's a Twitter. Eight hundred million dollars a year. Where the fuck is that going specifically? Audio tweets and fleets?
That's their big innovation, a weak copy of Instagram stories which has fallen flat in the marketplace. Another thought, the company should also consider acquiring and or creating its own vertical content. Verticalization takes a close second to a close second to Rundell in terms of creating massive stakeholder value. Branded content companies, including CNN and the New York Times, generate far more revenue per user than Twitter, and both Spotify and Netflix registered massive share price acceleration once they began investing in, guess what, their own content.
What happened to Netflix stock when they dropped House of Cards? What happened to Spotify stock when they decided to go vertical? Joe Rogan, clutching their stocks, absolutely went on a tear. And lastly, shareholders shocker spoiler alert deserve new leadership. Here's an idea. Full time leadership. Twitter has failed to deliver financial returns to its shareholders and allowed its platform to become a threat to democratic institutions.
Ultimately, ultimately, the failure here is management and legacy directors. It is time for a change. Company leadership has been warned repeatedly of the dangers it was courting by failing to moderate the toxic content flowing across its platform as far back as 2010. A study published in the Journal of Information Warfare warned that Twitter was opened, quote, a powerful tool for disinformation operations, close quote. Since then, people ranging from UK Prime Minister Theresa May to U.S. Special Prosecutor Robert Mueller to Twitter's then CEO Dick Costolo called out the company for its failure to address its problems with toxic content in December 2019.
I joined this chorus that's right, in a public letter to Twitter's board, argued that the company had put the pursuit of profits over the sanctity of U.S. elections. In addition, I wrote that the algorithms that promote conspiracies and junk science and inconsistent application of your terms of service have resulted in a firm that not only underperforms but is dangerous. December 19 is when I wrote this, by the way, I did not hear back that just poor form. Granted, I only owned three hundred and thirty thousand shares, but that's a lot of Kabbage for a prof.
Maybe, maybe just a quick nod, maybe just a quick phone phone call back. Hey Scott, go fuck yourself. Anything fine. But just a little bit of a response. Twitter's continued failure to address these issues I wrote open, quote, threatens the foundations of our social order, close quote. Despite an R&D budget now exceeding 200 million dollars per quarter, attempts to address disinformation and abuse via product development have been feeble. The company has been similarly inert when it comes to improving financial results.
The missed opportunities at Twitter, the missed opportunities has struck the most successful media firm globally. In twenty twenty was Tick-Tock. This product was developed a Twitter.
It was called Vine and Twitter. Management shut it down in January 2017, about the time that tick tock began to get traction. Oh, I wonder if that was by accident. Dorsey has repeatedly defended Twitter's embrace of the status quo. When challenged about the platform's role in spreading disinformation, Dorsey has positioned Twitter as the neutral platform for a global conversation. However, however, Dorsey, at least he's supposed to be the CEO, appears to have little interest in the problems on his platform just one month before the 2020 election.
When asked in a Senate hearing how much Twitter spent on content moderation, Dorsey admitted he did not know. With respect to the company's unacceptable financial performance, Dorsey has been visibly absent, all under the approval or the acquiescence of its board of directors. What the hell are you thinking? To take one recent example of Dorsey's inattention to the business is his near silence on the company's most recent earnings call and contrast with other tech companies CEOs presenting their firm's prospects to shareholders.
Dorsey spoke just 11 percent of the time, whereas his peers were responsible for nearly 50 percent of the content on the respective calls.
In other words, in other words, he speaks well. There's no other words. He's speaking one fifth less about his company because he doesn't know what the fuck is going on there. His insistence on managing Twitter from far flung retreats and months long adventures is absurd. Remember his his plans to move to Africa? According to The New York Times, Dorsey oversaw the company's response to the events of January six from a open, quote, private island in the French Polynesia frequented by celebrities escaping the paparazzi for years.
Those of us raising concerns about Twitter's toxic influence in society were accused of being alarmist. But techno utopianism ended on January six. The notion that our. Democracy is not vulnerable, is a dangerous one, and the fight to protect it continues.
Management enabled by the board has demonstrated a profane lack of regard for the commonwealth impotence, strategic thinking and an inability to capture a fraction of the shareholder value presented on the platform.
As an American citizen and shareholder, I find management's actions and inaction irredeemable. Therefore, therefore, we believe Mr. Dorcy and Legacy directors must leave the firm.
This is the part of the rand where I'm supposed to acknowledge that there's huge potential and there is, and that shareholders want to work with Mr. Dorcy and legacy directors know we don't get the fuck out.
Stay with us. We'll be right back after this break. Our conversation with Neil Irwin. No matter what stage of life you're in, thinking about your financial future can evoke some pretty strong feelings. But did you know the people who work with a financial adviser feel more at ease about their finances and end up with 15 percent more money to spend in retirement on average? Now, thanks to Smart Asset, the service had over half a million people have trusted to help find an adviser.
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Welcome back. Here's our conversation with Neil Irwin, a senior economic correspondent at The New York Times. Neal, where does this podcast find you? I'm in Washington, D.C., and my house nice in D.C., so let's start there. Give us the state of play around the economy here.
So, you know, I'm looking out my window right now and it is as gloomy as it can be. It's it's cold. It's wet. It's icy. It's it's not a good situation. The weather in D.C. right now, but it's also a situation where I can look ahead a few months and say that it will get better. Spring is on the way. It will get warmer. And that's how the economy is looking like. This is a very dark time.
Things are going the wrong direction, unemployment, things are going the wrong direction on an economic activity. But we're starting to see the pieces line up so that things can get better as the year progresses and nothing's guaranteed. We don't know exactly what the pace will be, how they'll get there, how long it will take things to really return to health. But more so than six months ago, we can now see what that pathway looks like.
You said that Trump had an incredible ability to ignore economic orthodoxy. What did you mean by that?
So, you know, Donald Trump comes in as president four years ago and says we're going to have the strongest, most booming economy ever. That was his promise. And in terms of growth, that's not what happened. Things kind of kept growing at a steady pace. But the truth is, things really did by by the time we got to the pandemic, by the time we got through 2019, early twenty twenty, the economy really was better than it had been in a very long time.
And in fact, that raises questions of has the economic orthodoxy held for too long been too pessimistic for too long? There's been this view throughout the economics profession that eventually if the unemployment rate gets too low, you'll just have inflation. You don't want to get too low. Eventually, if deficits are too high, you'll have a spike in interest rates and you'll have inflation. There have been these speed limits that the economists at the Federal Reserve and the Congressional Budget Office and kind of the the mainstream centrist policy elite has believed in for a long time.
And I think the Trump contribute to this evidence that those speed limits aren't what we thought and that the economy actually can come at a higher level. We can have lower unemployment than than anybody used to think.
So talk a little bit about inflation, because I was always under the impression that, well, you've said that don't think of the risk of inflation. Think of specific risks to inflation.
Can you can you detail that? Sure.
So, you know, you hear this noise around, oh, we're going to get inflation. We have the government spending all this money. We have the Fed keeping interest rates super low for four forever. That's inevitably going to cause inflation. And of course, it might you could have inflation happen. But but I think we have to be careful with our terms, what we're really talking about. And there are different forms that inflation can take that have different implications for whether it's really something to worry about or to view as a negative.
At the most benign end, there's just a kind of rebound effects that could happen as the as we get through the 12 month point of the pandemic from last spring. So at that point, you're going to see a lot of goods, especially oil, electricity, certain retail goods. There's going to be huge price spikes just because of the base effects, because of the 12 month period passing through. Others are a little more lasting. Right. So you can imagine a scenario.
People are going back to hotels, restaurants all at once in the summer fall, whatever it might be. And and there's actually a spike in demand, fixed supply. You can have a situation where for those particular products, you have huge price spikes because of a mismatch between supply and demand. But that's also not something that we should really worry about too much. That's market suggesting. And hotel rooms in Miami cost a lot of money. That's a reflection of supply and demand, not something that's a systemic problem in the economy.
Things get a little more interesting if you think there's going to be an effect where all this money people have been saving for the last years, they've not been spending money on things. Do they all rush out to spend that money at once? Does that create a kind of sloshing of money through the economy that can cause a broad based rise in prices, in wages within limits? That's a positive thing. That's creating a good self-sustaining expansion, but at extremes that can create something like the nineteen seventies where there's just too much money sloshing around in search of too few goods and you get a broad base of price increases that can feed on itself.
So I was brought up and I was an economics major undergrad at UCLA. That's the good news. The bad news is I got a two point twenty seven GPA, which means I know nothing about economics.
So but my understanding is when you create this level of deficit, when you print this much money, that you should naturally see some sort of inflation and the deficits don't matter until they matter and inflation doesn't matter until it matters.
And then I read these, you know, reviews of the deficit myth, the book that basically says that printing money is our. Absolutely the right thing right now, having it as someone who likes to think of themselves as fiscally responsible, aren't we drunk at the printing press right now? Isn't there real downside risk to creating these sorts of deficits?
I think what you have to ask is, OK, if that's the situation, if we're deficits are too high and interest rates are too low and the Fed is keeping policy too easy, what would the evidence of that be? Now, some people would say, oh, the fact that stock markets are booming and asset markets are booming, best evidence, I don't I don't do it that way. I think for evidence that that policymakers are running the economy too hot, that they're throwing too much money into the system, you want to see evidence in inflation and interest rates, particularly bond yields, inflation break evens, which is a way of measuring future inflation expectations through the bond market, things like that.
And you're not seeing that. What you're seeing instead is kind of the opposite. Yes, rates have risen a little bit in the last couple of months, but we're still at very low interest rates and we're still seeing all the forward looking indicators pointing toward inflation not being a problem. The reality I think we've learned is you can only really have an inflation problem when the economy is bursting at the seams and really has activity beyond its real economic potential, which is workers, capital equipment, all the things that people use to to make things.
And if anything, we've been below that potential for most of the last 20 years. And I think realizing that that's been the central problem of the last two decades. So the entire twenty first century being below potential, being cranking below what we're capable of trying to fix that and trying to get to the point where we're revving so we can even talk about inflation and deficits is a problem. That would be a sign we're heading in the right direction and we're not there yet.
When you have one percent, 10 year Treasury yields and you have all the forward looking indicators pointing toward low inflation for years to come, that's not the problem we're having in twenty, twenty one.
But my understanding is, even with interest rates at historic lows, we're now spending more on interest on the debt than we are in the military. And what happens if interest rates are cyclical, say interest rates do spike, don't we, with this level of deficit run the risk of forcing our federal government and Treasury to spend so much money just on the interest on these ballooning deficits that are crowds out all other discretionary investment.
So the thing to remember is that in a world in which interest rates rise, it's true that the government's debt service burden would also be rising. But that's also a world where nominal GDP is rising, meaning the size of the total economy thrives through some combination of higher growth and higher inflation. So it's both the numerator and denominator rising. You don't necessarily have a rising debt burden. So the simple way of thinking of this. So so I'll give you both the kind of the colloquial version and the technical version.
The technical version is nominal GDP growth is higher than interest rates. And and if you look at forward looking indicators, ought to be that way for a long time to come. So that's the equivalent of your household and you're borrowing money at, let's say, a two percent interest rate, but your income is rising at a five percent annual rate and you can borrow pretty comfortably when your income is growing faster than the rate that you're paying on your debt.
Yes, you owe an extra, let's say, borrow a thousand dollars. You owe an extra two hundred dollars, but your income rose by five hundred dollars, meaning you are more able to handle that less. So then the question of are deficits too big right now or too small? It boils down to do you believe that we can kind of jolt this economy back to life and have a situation where 10 years from now, nominal GDP, the total amount of activity in the economy is higher than it would have been otherwise?
And we're actually humming at a higher level and therefore comfortably able to afford deficits. You know, the most dangerous thing for for debt sustainability is if we end up in a low growth, low inflation trap for a long time to come, that would make it very hard to to handle the coming retirement boom, the Medicare spending, right?
Yeah. I mean, the risk is the real thing you want to be careful of is that we have we know these burdens that the federal treasury is going to be facing Social Security payments and Medicare payments for the baby boom generation as they retire. And those obligations are what they are. The bigger the economy is, the more we're producing in a few years, the better we are able to handle those. And making good policy now to get to that point is the real goal.
So, Neal, I want to put forward a thesis and you tell me where I have it wrong. And that is we've seen massive, unprecedented stimulus. We've seen a modest decline in compensation, which masks the real pain because we have most of the people who've taken a hit in terms of their earnings who are making a lot to begin with. And it also the net number is lower than you might think because there's. Raises, we have a trillion dollars and just direct stimulus into people's hands, we have marginal loss in compensation.
I think on a net level it's about 50 billion dollars and we have a half a trillion dollars in incremental savings because no one is going to the Olive Garden or Disney. So we have one and a half trillion dollars in additional capital out there that has flooded into the market or people to save. It takes interest rates down, which again bolsters equity markets or actually goes directly into the markets, into a small number of story stocks, because people don't want to do the research.
They want to go into Tesla or Apple or Amazon. And the result is a massive inflation in the in the value of assets which are owned by rich people, one percent, you know, 80 percent or 90 percent of stocks owned by the top one percent. And we've just created this upward spiral of making the wealthy super wealthy on the credit card of future generations.
I've read somewhere that 50 only 15 percent of people who received their stimulus plan on spending, this wasn't the stimulus, essentially a grift where we have thrown some loaves of bread and a circus at people who really needed it. But really, the primary objective of the outcome here is to take the rich and just make them super rich. I know that was a mouthful, so I'll give you some time to unpack that.
So, look, I don't a lot of your diagnosis. I don't disagree with it. All right. So it's clearly the case that asset prices have risen remarkably over the last year for all the reasons you're describing. If you had told me a year ago that we would have six and a half percent unemployment, 900000 people filing jobless claims every week, all these bad things happening in the real economy, all these people unemployed, and yet the stock market would be up 15 percent in 2020, that we'd have penny stocks going through these insane booms because everybody is rushing into them, you know, really 1999, 2000 dotcom bubble types of dynamics and a lot of markets.
And I completely agree with that. And I also agree with the piece that, you know, when there's a surge in asset prices like we've seen, people who own assets are the beneficiaries, which tends to be the rich, as I say.
That said, I think you have to think through some counterfactual here. You know, a lot of the to think that the the fiscal actions last year are just helping the rich because these things are happening, I think is completely wrong. Look at some of the biggest pieces of this. You know, these are the checks that went to most Americans. First of all, they have a phase out of high income. So that's mostly people at low and middle level incomes.
Unemployment insurance benefits were a big piece of that. That was a you know, that's literally putting an extra 16 dollars a week in the pockets of people who did not have a job because they lost due to the pandemic. So, you know, I think the fact that we've had this surge in asset prices, which I did not expect to be clear, I you know, I think these dynamics are describing where there's all this pent up savings it's going into to to bubble up asset prices was not something I would have expected a year ago.
But just because that's happening doesn't mean the stimulus is, you know, futile or just a thing for the rich. And I would add that if anything, the riskiest thing, if you if you are worried about asset bubbles and worried about the rich getting richer, fiscal actions really more powerful than the monetary action, I think there's a stronger case that explains the difference between the two.
So so, you know, the Federal Reserve controls interest rates and can buy lots of securities, usually Treasury bonds. But lately they've last March, they went into being ready to prop up different types of securities markets for corporate debt and other things. And that's one factor in this surge in asset prices that you're talking about. And so, you know, a lot of people say, oh, the Fed's driving up asset prices. There's certainly some truth to that.
But I think that the important thing is, you know, what we saw last time in the 2008 recession and recovery when fiscal policy does too little, monetary policy ends up doing more to try and get the economy on track. And that is a that creates an expansion that is more weighted toward asset prices and more beneficial to the wealthy. So I think the best thing that can happen if we want if we want to be in a world where ordinary people are doing better and asset prices aren't aren't just going toward Bubley levels, having a government response more weighted toward fiscal policy is beneficial.
If the Biden administration is able to spend some serious money like they're talking about to pump to directly to individuals, to families, to unemployment recipients, that implies that the Fed is going to be raising interest rates sooner rather than later. And that implies that some of these effects that mostly affect asset prices will be unwinding.
So a few I want to get your thoughts on a few policy ideas. There's always a tension between capital and labor. Feels like to me that for the past three decades, capital has been kicking the shit out of labor, that we're very quick to call for bailouts of small businesses or airlines when there's an exodus of. Event of a pandemic, but it strikes me we've had this exogenous event where the asset owners are just killing it and we do have deficits, we do need to fund, you know, programs to get our brothers and sisters in the wealthiest nation in the world out of food insecurity.
It seems to me that why wouldn't why is no one calling for, you know, in these extraordinary times of wealth creation among people with more than 10 million dollars in assets at one time? Well, tax and I've always just thought that the mortgage tax interest deduction and capital gains are nothing but a transfer of wealth from the poor to the rich. And as somebody who makes all of their money from capital gains, the notion that I'm less or more inclined to invest because of the rate on capital gains, I had never have any idea what it is.
And that and the notion that somehow you're going to starve the world of capital if you take up capital gains tax.
The investment world is flush with investment capital right now. That is not the problem at all.
So I just find all of this as a narrative to kind of make the rich super rich.
And anyways, I just wanted to get your thoughts on what I am missing here.
No, I look, I think there's something to that. So it's a play. You're talking about individual income taxes. But on the corporate tax code, we had the Trump tax cuts the day that passed at the end of twenty seventeen. You know, the entire theory behind that law was to cut taxes on corporations by a lot, encouraging capital formation, encouraging investment. The idea is you get higher productivity, make the pie bigger. Everybody is richer.
But my read of the data is that you cannot see in 2018, 2019, some you get stock buybacks, stock buybacks.
You get, you know, higher, higher after tax earnings by corporations, higher stock prices. But what you don't see real evidence of is a surge in capital spending and the kind of things that really drive productivity in the long run. So I'm sympathetic to what you're saying, that like, you know, this entire framework of tax policy built around, we have to encourage capital. We have to encourage investment. And I don't see the evidence of that clear cut evidence that it really shows dividends.
And if you were to if you were on Biden's economic team, what are the two or three things you would recommend as a policy that you think would help the economy or, you know, help start addressing income inequality, jumpstart growth? What would what would your you know, you got five minutes or 60 seconds. What are the two or three things that Biden Harris should consider?
Look, Biden has surrounded himself with people who are more deeply versed in all of these issues than than I am and every kind of idea around inequality reduction, what's politically feasible. He has very smart people he's listening to. But one thing I would kind of chime in on that is, is the idea of making some of this response to the to a recession, to a crisis more automatic and more tied to economic conditions. So think back to last spring.
We have this crisis. They expand unemployment insurance benefits through I think was through the end of July, but then they just went away. And even though the crisis was still very much underway, well, what if instead we had a set up where OK, any time the unemployment rate spikes above this level, we're going to have these expanded unemployment benefits. What if one of those was built into the law in an ongoing way so it didn't depend on the whims of Congress and who happens to be in charge and what the political dynamics at that exact moment are, but rather the government's going to step in and help ordinary people who are in trouble based on the scale of the crisis, according to economic data.
And that's what a lot of center and center left wonks have been talking about for years. There are certainly people in the Biden orbit who are, you know, big boosters of these ideas. But it does not, as of right now, look like it's making its way into this legislation, making its way through Congress.
So advice to your younger self and assume your younger self is an economic animal that just wants to position him or herself with a skill set and in a sector where they'll be able to develop economic security for them and their families. What advice do you have for young people in terms of how the economy is reshaping and how they prepare for that reconfiguration?
So I think fundamentally we're in a world where, you know, the forces that contribute to bigness, that contribute to large organizations are having a lot of advantages, are very powerful. And, yes, there's more blowback on antitrust and kind of business. And we'll see what direction the Biden administration goes on that. But it's not a coincidence that Apple and Amazon and Facebook and Google are currently some of the most valuable corporations that have ever existed in the history of the world.
It's not a coincidence that, you know, the biggest banks have gained market share over you in the banking industry or retailers. Amazon and Walmart have gained market share over mom and pop stores. And some of that is what we can talk all day about the reasons. But some of that really is driven by technological fundamentals. And, you know, you have a situation where network effects are powerful, where platform economics that are underneath a lot of businesses are bigger than ever.
You know, even things that you don't think of as tech businesses, you know, banking partly. I choose my bank because I want to be able to go to an ATM on every corner. So that creates a kind of network effect for which bank people put their deposits. And that's a long way of saying being in one of these big organizations, that's one of the kind of winners in the winner take all economy is important. And to be the type of person who can thrive in that, those types of organizations, it's a distinctive thing.
It's a little different than a world where there's dozens of mid-sized companies competing. It's understanding the way technology intersects with the economic rationale of a company. It's understanding the moving pieces of of how the company makes its money. And it's so that's that's what I believe is kind of the crucial ideas for understanding how to chart a career in the 21st century.
So I want to pause there, because there's always a moment with one of our guests where I think that our viewers or our listeners, I should say, should really register what's been said or the point that it's made. And the point I think you are making, and I don't think I'm putting words in your mouth, is that we romanticize small business. And big is not only bad or not or is not bad, it's actually better in our economy.
And when kids come to my office hours and they say graduate from business school, huge opportunities and they say, I have an offer from Google, but I really want to start a small business, I'm like, don't be a fucking idiot. Go to Google. That on a risk adjusted basis, the greatest wealth creation vehicles in the history of mankind have been what I refer to as unregulated monopolies, which is sort of another way of saying big.
And I'm not saying you want to fight City Hall, these companies on a risk adjusted basis if you have access to them, if you can go to work for the one of the leaders. And and not only does big tech, but Big Pharma, Big AG, big, big banking on a risk adjusted basis, your efforts will get greater return there.
And we don't like to talk about it because we like to romanticize entrepreneurship, we like to romanticize small and big, but there's just no getting around at these platforms are incredible places to build, to build careers.
So I think my sense is you have an awesome job. Can you give us a sense of how you got where you are in any sort of pivotal or seminal moments or decisions and getting you to this what seems like a pretty, pretty cool gig?
It is a pretty cool gig. Thank you. So so I started out as a summer intern at The Washington Post in the year 2000. When I graduated from college. I was on the on the local business desk and I wrote articles about dinky little companies in Washington, D.C. that were, you know, 20 percent startups trying to make a go of things. So kind of grew up in that traditional newspaper world. Came back to The Washington Post after grad school and cover the financial crisis.
I covered the Federal Reserve and the Treasury Department and the economy during the global financial crisis, which was really a formative experience, seeing how these moving pieces of financial markets policy, the economy, how they fit together, how they can make each other better or worse. That was my formative career experience. Jump to The New York Times in 2014 to take on this role as a kind of a roving economics commentator, analyst, writer. And I've been with a team called The Upshot at The Wall at The New York Times since 2014, which does amazing work.
I'm especially impressed with the infographics and the creative team at the Upshot. I just I think the work you guys do is inspiring. OK, so it always really upsets me when I find out that people as talented as you are that much younger than I am. So I am I am 14 years or 13 years older than you ideally. And don't hold back and don't give me this bullshit. I just want to be adding value or doing exactly the same thing.
Try and push the limits of your or just trying to as raw as possible in 13 years when you're my age, what is your perfect where would you what seat would you like to be in professionally. What would just be just awesome. What bells do you want to ring.
It's tough. You know, this is something I'm wrestling with all the time. I'm look, I'm forty two. I have I have a cool job as you and I like my job. But, you know, ultimately I'm way too young to just kind of say I'm done. I'm going to do this for another twenty five years and then call it a day. Like, that's not a good way to live. And I firmly believe that people need to to shake it up and try something different and stress themselves in new ways.
And that's the way to both, to both to expand your horizons to to remain competitive on the job market, but also for for kind of quality of life and to feel good about yourself and to feel like you're always growing. The thing is, I have a hard time telling you what direction that will be. I I've looked that what I'm doing in thirteen years looks different than what I'm doing now and feels different and involves creating really good work. But if I was to try and tell you what exactly what feel exactly what type of employer, exactly what format I think would just be hard to do.
But if if I come on this show in ten years and doing the exact same thing, please slap me and tell me that I've done it all wrong because I really do believe that's the case.
Neil Irwin is a best selling author and senior economic correspondent at The New York Times, where he writes for The Upshot The Times site for analysis of politics, economics and more. He's also the author of The Alchemists Three Central Bankers and A World on Fire and How to Win in a Winner Take All World. He joins us from his home in Washington, DC. Neal, stay safe.
Thanks so much, Scott. We'll be right back. Welcome back, let's bust into office hours, boom, bust away question number one.
Hey, Professor Galloway, this is James coming at you from Boston, Massachusetts. I wonder how you respond to the idea that Bitcoin has made the transition from currency to a security. When it was originally founded, Bitcoin was meant to be a currency that people use for transactions, a lot like a digital gold. And now with recent market volatility and a lot of press coverage, it seems to be treated a lot like a security, a lot like an investment vehicle, things that people are making a bet on but not necessarily transacting with.
I just wonder if you could respond to this and sort of talk a little bit more about Bitcoin as a investment vehicle rather than a currency. And if you see any downsides or any upsides to that type of transition, thank you so much.
I love the show.
James from Boston, thanks for the thoughtful question. We're getting a lot of questions about Bitcoin. As a matter of fact, I most downloaded episode was our episode on Bitcoin. And I think we had Michael Celeron, who's a very thoughtful guy. I've actually known Michael for about twenty years. I don't know. I don't know why I decided to tell you what I most downloaded episodes are anyways. Anyways, if you talk to somebody, a bitcoin or even coin desk, they would not want to acknowledge that Bitcoin is a security.
A security technically represents ownership in a company or a lean against a company's finances. And the moment you do that, you have to be regulated by the Securities and Exchange Commission. So they would say, no, verboten. We're not we're not a security.
Is it a is it a payment mechanism, something you can be used to transact an exchange of goods? Well, OK, then maybe it's a payment method. Fair enough.
Although I don't know that many people who are using Bitcoin to buy assets, I would argue that if it's anything definitive, it's a currency and a currency is just something the two parties agree can serve as a store of value.
I think Bitcoin, if you will, sort of benefits from this inability to label it as a specific type of currency, product or asset, because that unleashes it from any distinct valuation metrics. All we know is it is a currency or potentially a store of value because different parties have agreed it's a store of value. It has this hip anti-government technology feel to it. It is seen as a hedge potentially against inflation as gold funds have declined. Those declines are correlated to the increase in Bitcoin's price.
So people say, OK, if I want to take off for Europe with a go bag, I can take 100 million dollars of the Bitcoin with me pretty easily. To take a hundred million dollars worth of gold is not easy. Also, gold is very hard. It's not very divisible. So it's not a great payment platform. So it sort of benefits from this mysterious techno feel and not being defined specifically as a payment, as a security. And I also believe with any hint of inflation, this thing skyrockets.
I predicted it was going to go to 50000 dollars this year. I predicted that when it was at nineteen thousand, immediately jump to 42000. Now it's back, I think are in the low 30s. So where do you go from here? I am. I haven't yet, but I am going to buy some bitcoin now. Why am I going to do that and why haven't I haven't? Because one of my many flaws as an investor is that I always want to buy things on sale.
And no matter where it is, I think to myself, I want to buy it at twenty percent less here. So even if something is a great buy, I think, OK, if it's twelve bucks, I want to wait till it's a nine and I lose a lot of stuff because it just continues going up from that point. I always want to buy stuff on sale, which I don't think is a great or Olympus way. It's been bad for me, so I've never gotten in because it consistently goes up about every time I decided I'm thinking about buying it.
But I think the reason you want to own a little bit of Bitcoin is I think there's a non-zero chance that this thing just goes parabolic, that at the first hint of inflation, insecurity around central banks, you could just see, coupled with some of the legitimacy that it's being lent by financial institutions, you could see this thing just go apeshit.
And I don't think you want to have kind of the ultimate form of saying, Jesus Christ, if I just own three coins, if I just owned five coins, right. Or one coin or a quarter of a coin, you can buy fractional ownership in Bitcoin. I think you want enough such that if the thing does go parabolic, you don't hate yourself. But at the same time, if it crashes and it could, I think this is a very speculative asset.
You don't you don't put your financial well-being at future. That that sounds like a mealy mouthed answer. Put enough in such that if it goes way up, you don't hate yourself. But I would be very careful putting more than, say, five or ten percent of your net worth in Bitcoin. Having said that, the people who have. Wow. Kuching, have they done well? Thanks for the thoughtful question, James from Boston. Next question.
This is Julianna. Naran Johnston in New York City. I'm the founder of the trade publication Business of Home. So naturally, I've been loving your prediction that home brands are poised for major growth and the new economy.
My question is about Amazon. Many of my friends try hard to support small Main Street businesses as opposed to Amazon and rightly believe that Amazon is demolishing retail. But I have to wonder if there's not a garden of new businesses that have cropped up as Amazon platform sellers. My publication recently profiled a small business in Ohio that sells different colored plastic containers on Amazon and is doing 250 million in revenue by dominating this little niche. It seems to me that this is an underrepresented group of businesses that media isn't necessarily covering.
Shouldn't platform sellers count as small businesses as much as local storefronts do? Can I feel less guilty about shopping Amazon if I'm supporting small businesses who are selling through Amazon? Thanks so much.
Love your show, Julia from NYC. Gangster question. Gangster question. I think I heard a daughter or son in the background which one of the wonderful things about working from home is people have become much more tolerant of kids in our lives. Right. I've been on MSNBC and my you can hear my kids in the background and they're totally down with that. And I think that's a wonderful thing. We have families. There's no reason that we can't acknowledge that and occasionally have some work interruption.
So what do I tell entrepreneurs who come to me and say, all right, I'm starting a small consumer business? I mean, well, there's two assets. There's two core competencies to taking a business from kind of zero to 50 million if you're in a consumer business out of selling an actual physical hard item to get consumers. Those two things are.
Incredibly adroit use and deft use of Instagram, great consumer brands, whether it's a beauty brand, a new Swiss vacuum cleaner or some sort of new hair removal technique, whatever it might be, typically, typically the way you get grey top of the funnel awareness and drive a lot of attention is through Instagram.
And then number two. Capitalist distribution on Amazon, Amazon is a fantastic partner to leverage their capital, their infrastructure, their fulfillment, their massive traffic, I don't I think they are doing a fantastic job. I think there's a ton of small businesses benefiting from Amazon.
The problem the problem is that once you get big enough sets that the algorithm on Amazon says, you know, you're a business. Selling this type of weed killer has amazing margins and is selling really well. We just might get into Amazon Essentials and introduce a weed killer. And that is when you're sitting on top of that data set and you decide, OK, batteries probably have a 70 or 80 percent gross margin. All batteries are produced in one of three factories in Shenzhen.
Why don't we just move in and kill Duracell and Energiser? And some people might say, great, that's disruption. Yeah, that's fine. But at some point when the platform gets to see all of your data and then move in and make sure no small business ever becomes a medium sized business, Houston, we have a problem. And that's the problem with Amazon. But by all means, zero to 50 million, maybe even zero to one hundred million.
Or even if you're an established brand such as like a toomy that wants to increase your sales by 10 or 20 percent, I think Amazon is probably an incredibly prosperous, mutually beneficial platform. I don't have an issue with that. By all means, kill it. MegaBank on Amazon, embrace Amazon. What I do have a problem with is a company that is established monopoly power and isn't letting any acorns or saplings grow up to be redwoods. And that's what Amazon is doing.
Amazon isn't doing anything that Macy's or J.C. Penney's hasn't done in the past where they observe all the little brands growing and then introduce their own private label. It's just that Amazon is doing it at scale.
And as a result, we have 50 percent as many new businesses being formed every day because it's just getting more and more difficult to to grow your business anyway is a great question. I am I'm a fan of Amazon's marketplace, Amazon's platform for early stage consumer companies. I'm just not a fan of Amazon's monopoly power and how I think it suppresses wages and lowers growth in our economy.
Next question. Scott Marshall, Goldman Livingston, New Jersey, wanted to get your thoughts on storage stocks as a form of investment. Are they here to stay if that concept of investing versus looking at true metrics, the future investing, is it just time and place that we have good storytellers and there's abundance of cash that's looking to be invested and people are not doing analysis and actually just looking for that forward momentum in that story? Or is this the next way, the new generation, the new way to analyze it, to look at a stock?
Less on the numbers and more on the story.
Marshall from Livingston, thanks so much. An interesting question. So typically, typically, stock is driven by two things. The numbers in the narrative. You look at the four wall unit economics. If it's a retailer, you look at the gross margins. If it's a CPG company and you always look at growth and then you assign kind of you look at its peers and say, alright, salty snacks. CPG company typically trades at 12 to 15 times EBITDA.
And then you look at the management and you listen to their vision. And if it's a compelling vision, it's a compelling story. You give it 15 times instead of 12 times. So roughly speaking, kind of two thirds numbers, one third narrative makes up the valuation that is flipped.
Now, it's effectively the narrative storytelling, I would argue, is the core competence of a CEO that when Elon Musk outlines his vision for any future, it's very compelling. You buy the stock. He then accesses the cheap capital of that stock and pulls the future forward. Amazon's initial or Jeff Bezos initial shareholder letter saying they were going to be ruthlessly focused on value, convenience and I think speed commune's selection. You just wanted to buy stock when you heard that.
And despite not being profitable for whatever it was, ten or fifteen years, this story sustained the stock and they were able to pull the future forward without cheap capital. So storytelling or the narrative, if you will, has become increasingly important. And now it seems to be 90 percent of some of these stock companies valuation. You just have a very difficult time justifying on any traditional valuation metric some of the valuations in the market. Now, about the time you decide that it's all about the story and we've entered a new economic model is when the market crashes and we revert or there's a regression to the mean and straight, fundamental numbers start to matter again.
So. So what does that mean? I think we ride it and enjoy it.
And I've advised a lot of CEOs recently on what is the story, you know, OK, why are you disruptive? Who are your peers? What is the vision?
What is the the really compelling story that you can put in a box and then communicate to the market? Place such that they will weigh in, drive your stock up and you can use their stock as currency to go pull that future forward. So I don't see a changing for a while. There will be a regression to the mean and the regression to the mean will be especially vicious. The markets are cyclical and the stocks that get hit the hardest will be the ones that have have, quite frankly, become kind of 90 percent negative and 10 percent numbers.
So I think those those companies will be really vulnerable. But until then, my brother read Green Eggs and Ham.
We want we want that storytelling. And it is incredibly important. Never has vision met more in the financial markets. And also it seems as if the numbers themselves are totally disarticulated from the valuation. Where does it end? I don't know about the time. Guys like me say a market is overvalued. It usually has another two or three years to run that crazy compound rates.
But this is something I think about a lot.
And as long as it's running, look, everyone said the first trillionaire was going to be a climate. It might be a might be Elon Musk. Elon Musk has added the value added the value of the GDP of Hungary to his personal net worth since March. Think about that. And there's only one point two million electric vehicles in the world. There's one point three billion internal combustion vehicles. Why? Because it's an amazing story. Save the planet, great product, electric.
And by the way, this is the guy in the mind that can put people on Mars. So what better story is there? I go out to my I go to the beach and I see I think it was called the Dragon Capsule Dragon.
SpaceX Dragon something Dragon something Dragon. Game of Thrones, no SpaceX and launching their capsule. And I'm with my kids and I see this SpaceX capsule flying into the to the near atmosphere. And I think I got to go buy Tesla's stock or I got to buy SpaceX stock, which is available in the private market. So anyways, the story never been more important than ever.
Does it probably mean there's a pretty vicious fall concentrated among story stocks? Yes, but I'll tell you, it's hard to stay away from these things right now because it's a champagne and cocaine among the storyteller. Thanks for the question, Marshall.
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Genius, genius, genius.