Nick and Goldy answer more of your questions! What’s the deal with cryptocurrency? How are people still saying that inflation was caused by the stimulus? Is capitalism better than market socialism? Plus some summer reading recommendations and an important podcast announcement.
If you have questions for a future AMA episode, leave us a voicemail at 731-388-9334.
Why This Computer Scientist Says All Cryptocurrency Should “Die in a Fire” https://www.currentaffairs.org/2022/05/why-this-computer-scientist-says-all-cryptocurrency-should-die-in-a-fire
Consumers deserve an inflation rebate (with Congressman Ro Khanna) https://stg.pitchforkeconomics.com/episode/consumers-deserve-an-inflation-rebate-with-congressman-ro-khanna/
Website: https://stg.pitchforkeconomics.com/
Twitter: @PitchforkEcon
Instagram: @pitchforkeconomics
Nick’s twitter: @NickHanauer
Nick Hanauer:
It’s summer. And it’s a great time to answer some of your questions.
Brett Armstrong:
Hi, Nick. But I was wondering if you could discuss more at length the idea that wealth concentrates because the return of capital tends to exceed the general rate of economic growth.
Goldy:
Why do you think that capitalism would be better than market socialism?
Annie:
Dear Nick, I’m beginning to hear about investing in cryptocurrency. Can you give a quick primer on this emerging phenomenon?
Speaker 5:
From the home offices of Civic Ventures in Downtown Seattle, this is Pitchfork Economics with Nick Hanauer, the best place to get the truth about who gets what and why.
Nick Hanauer:
So Pitchfork Economics gang, we’re back for another AMA, Ask Me Anything. And it’s summer, and it’s a great time to answer some of your questions. We love doing these AMAs, and we collect questions all the time. So you can send us messages through our website or leave us a voicemail anytime that suits you, and our number is in the show notes.
Goldy:
And before we start Nick, we want to plug a new podcast called When the People Decide. It’s from the McCourtney Institute for Democracy at Penn State. And it explores the promise and sometimes the peril that ballot initiatives have brought to American democracy by telling the stories of people who have organized initiative campaigns across the country. You’ve organized some initiative campaigns, Nick, haven’t you?
Nick Hanauer:
Yeah, a couple 300. Yeah.
Goldy:
And it makes a really big impact, which we’ve talked about before, some of the initiatives we’ve run in Washington State on the economy and on gun responsibility in particular.
Nick Hanauer:
Yeah.
Goldy:
Leading the country on that. Couldn’t have done it without ballot initiatives. When the People Decide is out now, and new episodes will be released weekly through August one.
Nick Hanauer:
That’s awesome. So any summer reading recommendations, Goldy?
Goldy:
You want my depressing ones or the…
Nick Hanauer:
No. The good ones. The good ones.
Goldy:
Oh, well, they’re all kind of depressing when you’re reading about economics [inaudible 00:02:27]. On a recent podcast, I interviewed the economist Oded Galor and his book, The Journey of Humanity. It is a little science-heavy in spots. You can feel free to skip over those sections when it gets a little too academic on you. But a lot of insight into the evolution of prosperity over the course of human history.
And the fact that really, and this might be stunning to folks, that even we had millennia, really, millions of years of gradual technological advance quality of life really had not improved much until the industrial revolution. And it’s a really important point he makes about there being this tipping point in this phase change in terms of human societies and what we need to do to maintain the current phase that we’re in right now.
Nick Hanauer:
So here’s my recommendation. It’s an oldie, but a goodie that I’ve just reread that I could not endorse more highly, which is Joe Henrich’s book, The Secret of Our Success.
Goldy:
Ah, yeah.
Nick Hanauer:
It’s just a page-turner about the co-evolution of culture and genes. Basically, the evolution of humans as a species. It’s just an amazing book about how the world fits together. I just couldn’t recommend it more highly.
Goldy:
Absolutely. It is… I found it one of the most influential books I’ve read.
Nick Hanauer:
Yeah.
Goldy:
It’s a book by an anthropologist but influential in terms of my understanding of how the economy actually works.
Nick Hanauer:
Yeah, for sure.
Annie:
Okay. So let’s get into the questions. Kevin Newman. “I’m curious what Nick’s opinion as a capitalist is on unions versus having some kind of worker representation on either an advisory board like in Germany or even right on the board of directors bonus points for thoughts on full-on worker ownership. I’m curious to have a successful capitalist perspective on adding workers to the decision-making tier and privately-owned companies, perhaps even distributing real ownership in some way to maintain that distribution of power.”
Nick Hanauer:
Yeah. So, Kevin, that’s a great question, and it’s complex, but couple of three questions embedded in that. So let’s start with the first, which is I think that the system in Germany where unions have worker representation on boards is actually a really, really good idea. Obviously, the big problem in the United States is that workers have no power, and capital has all the power, and so all the goodies go to capital. And by distributing power in a new way and better way, you’re just going to have less of that.
And I think it goes two ways. I think it’s an incredibly constructive thing to have workers on boards because the board is forced to deal with the legitimate concerns of workers. But equally, workers are forced to confront the legitimate challenges of running the business. And that collaboration will almost certainly enable the enterprises to operate more effectively because there are many, many circumstances where workers’ demands are completely legitimate and within the scope… within the power of the corporation to grant them without existentially threatening the enterprise.
But there are other circumstances where something that workers ask for seems reasonable. But actually, in practice is very, very difficult, or expensive, or existentially threatening to the enterprise.
Goldy:
This gets down to the name of the system. People call this stakeholder capitalism. And when you treat your employees like stakeholders, they will feel like they have a stake in the success of the company.
Nick Hanauer:
Correct. Correct.
Goldy:
And behave accordingly.
Nick Hanauer:
Absolutely. And that cannot be bad for the enterprise. The second question you asked is more about co-ops or employee ownership. And, of course, I come from the tech world where almost everyone does have ownership in enterprises, although not much power. And I think that distributing ownership to employees is a good idea, but I’m not a big fan of co-ops because there’s not a lot of evidence. There are some examples of successful co-ops, but there’s not a lot of evidence that co-ops can successfully compete in competitive markets.
And I think there’s a reason for that. And that is that democracy is a fantastic system for governing societies. But it is not a great system for governing enterprises because democracies require a decision-making process that is laborious and time-consuming. And in business, for better or worse, you have to make very, very quick and very difficult decisions all the time.
And my sense is that while spreading ownership out, I think, is a really, really great idea. You have to have a very… a structure of decision-making, which is incredibly decisive. And that tends not to be the case in co-ops. So, anyway, that’s my instinct about it.
Goldy:
So it’s interesting, Nick. It looks like you jumped into our second question, which was from Blake on Instagram. “Why do you think that capitalism would be better than market socialism,” which he defines as everything is co-ops. You’ve laid down your objection to co-ops. I mean, there are co-ops to some extent. A lot of them seem to operate like ordinary corporations.
Nick Hanauer:
Yeah.
Goldy:
We have REI in Seattle which has labor disputes that have gone on embarrassingly. So it’s not always…
Nick Hanauer:
But REI is a co-op in the sense that the customers own it.
Goldy:
Right. The customers [inaudible 00:08:48]-
Nick Hanauer:
Period. You get…
Goldy:
… not a worker owned.
Nick Hanauer:
Yeah.
Goldy:
And I think this is really important in terms of both questions. It gets to the way we describe the market as an evolutionary system. So you have groups of highly cooperative individuals working together to innovate new solutions to human problems.
Nick Hanauer:
Right.
Goldy:
And then you put those solutions out on the market to compete against each other for purchase from consumers. And that is literally the act of selection in an evolutionary system. And those products and services that people buy the most, those survive. Companies know. They get that information and that money back, saying, “Yeah, that was the successful solution.” And then, that forms the base for the next generation of innovation.
You’re going to innovate off of the products and services that already exist. And you go through that cycle iteratively. And that’s why the market is so good at evolving these new solutions at creating new and better product and services that will actually evolve to fit changing economic and social circumstances.
We’ve been writing about this. Recently, we used a… not published a, used a toaster as an example. There was a time when those narrow slot toasters that’s what a toaster was. And then, all of a sudden, bagels became popular, and you needed… and those weren’t any good anymore.
Nick Hanauer:
Yeah.
Goldy:
So we had to evolve wide sliced toasters and toaster ovens so you could toast bagels, which you didn’t need to do in most households 75 years ago. So that’s the way the market works. And when you look at things like stakeholder capitalism and co-ops. I think on the stakeholder side, one of the things you didn’t quite get at is that it actually makes these companies more innovative because it adds this diversity of perspective to the company. Because, now, you’re actually listening to your workers.
Nick Hanauer:
[inaudible 00:10:52].
Goldy:
You have to because they’re sitting on the board with you. And workers are the ones who are actually neck-deep in production. They know where the problems are because they’re dealing with them every day. And they’re also thinking about the things they’re creating, and they are innovating in their own head. So there’s a lot of feedback that can come from workers that not only are they more cooperative because they feel like they have a stake in it, so they’re more able to cooperate in innovation, but they’re adding new and different perspectives to the process.
And we’ve talked about this before on the podcast. The way you supercharge innovation is through diversity of perspective. The more people coming at the same problem at the same time, from as many different perspectives. Better to have a very diverse group cooperating together than it is a bunch of MIT eggheads who are all going to think alike.
Nick Hanauer:
Yeah.
Goldy:
No matter how smart or well educated they are. This innovation side also comes in, I think… Blake, I don’t know that I’ve ever heard the term market socialism at least described as everything as co-ops. I think if everything was co-ops, I think that would take some of the dynamism out of a market economy because that competition is really important. And let’s be honest, people are competing for material gain. So if everything is a co-op, I just don’t know that’s going to be as innovative an economy.
Now, that said, we do have, throughout most of the Western world, social democracies with market economies. And there is a great example. They’re very dynamic. You can’t say that Germany is not dynamic. That is a social democracy. And there, what you’re doing is using the proper tool for the job. There’s some things where the market is the right way to address the problem. And there’s some things like healthcare where the government is the most efficient tool, and you want the balance of the two. So I don’t think it’s one or the other.
Annie:
Number three. Nick Bruno. “Hi, team. What do you make of the claim from oil executives that the price of fuel reflects basic supply and demand economics?”
Goldy:
Oh, Nick, I think maybe you’ll disagree with me, but I think they’re absolutely right. It is basic supply and demand in the sense that a handful of giant oil companies control the supply unless they can demand whatever they want at the pump.
Nick Hanauer:
Exactly.
Goldy:
Supply and demand.
Nick Hanauer:
Exactly.
Goldy:
Just like they taught in econ 101.
Nick Hanauer:
Exactly. And in a recent Roosevelt Institute report, I think it’s become incredibly clear that profits for corporations have never been higher as a consequence of up the supply and demand. Look, here’s the thing is that we’re big believers in markets and so on and so forth. But the truth is that certainly in America, corporations are now earning, I think, it must be over twice as high a percentage of GDP as they did 40 years ago.
So corporate profits as a percent of GDP have gone from 5, 6, to 11, 12%. And that increase in corporate profits is not corporate profits because it has to be, or needs to be, or should be. It’s an increase in corporate profits because powerful people prefer it that way, that extra, whatever it is, trillion and a half dollars a year could be being spent on wages, or it could be-
Goldy:
Right.
Nick Hanauer:
… being spent on lower prices for consumers. The power imbalance is what’s creating that extra profit. And it’s going into the pockets of people like me.
Goldy:
This is one area where neoclassical economics is somewhat right where they model the economy as an equilibrium system. The same percentage of GDP that has gone to profits, that has shifted to profits, you see wages share of GDP falling by almost an exact amount.
Nick Hanauer:
Right.
Goldy:
So this is this upward redistribution of wealth and income-
Nick Hanauer:
Right.
Goldy:
… from the bottom 90% to the top 1%, and in particular, the top 0.1%.
[inaudible 00:15:06] our Exxon and BP and Shell. I don’t know how many oil companies are left. Are they buying some of their supply on the spot market? And are they paying those higher prices largely due to Russia’s war fascism on Ukraine, trying to destroy democracy in Ukraine and undermined democracies throughout Europe and in the west? Yes, absolutely. The price on the spot market has gone up, and they are buying some of their supply there.
Nick Hanauer:
Yeah.
Goldy:
But in fact, they own most of their own wells. Most of their supply is coming from leases where they’re pumping their own oil. And the US, by the way, the US is a net exporter or has been a net exporter over the past few years of oil and refined petroleum products. We produce a lot of oil here. The fact that there’s a war in Ukraine has nothing to do with the shale oil fields in Pennsylvania and the Dakotas and elsewhere around the country.
Nick Hanauer:
Yeah.
Goldy:
So, in the end, it’s not because their cost is going up. It’s because the price has gone up on the spot market and that allows them to justify higher prices. They also, by the way, own the refineries, own the brands. You can’t blame your local gas station for reaming you because A, they’re buying from the local refineries, and B, most of these franchises, and that’s what they are.
And some of them are small businesses. They’re buying from the refinery at the price that the refinery is charging. But also often they don’t have the power to set their own prices. That’s part of the franchising agreement. So they have these very complex formulas for how to maximize pricing. And that’s why you might see one Exxon station selling it at one price, and a few blocks away, you’ll see it for 30 cents, less at another Exxon station or 30 cents more because that’s how Exxon wants to set the pricing locally.
So this is, as we said, it’s a handful of giant oil companies who are taking advantage of the situation to earn windfall profits. And you and I, Nick, we’re both old enough to remember the 1970s. The oil shocks than when they did exactly the same thing, and we responded by imposing a windfall profit tax on the oil companies.
Nick Hanauer:
Yeah. Something that will never happen today.
Goldy:
No, because that would be socialism or something.
Brett Armstrong:
Hi, Nick. This is Brett Armstrong from Bethel, Pennsylvania. And I know you’ve touched on this point in your podcast, but I was wondering if you could discuss more at length the idea that wealth concentrates because the return of capital tends to exceed the general rate of economic growth. This is a subject that I’m very interested in, and I think it needs to be addressed a little more fully.
Nick Hanauer:
Brett. That’s a great question. And, of course, you’re referencing Thomas Piketty’s work. It’s r > g, isn’t it, Goldy?
Goldy:
Yes. r > g.
Nick Hanauer:
Yeah.
Goldy:
That is the thesis of capital in the 21st century.
Nick Hanauer:
Yeah. But I think that r > g is true, but it doesn’t sufficiently explain why wealth concentrates.
Goldy:
Right.
Nick Hanauer:
And I think that there are far better reasons that wealth concentrates. And principally, it has to do with the nature of complex systems and ecology like the economy, which are what are called, and this is a fancy word, non-ergodic systems, which means that the system itself is characterized by path dependence, luck, and compounding.
And the way to understand the difference between a ergodic and a non-ergodic system is the difference between Monopoly, the game, and Checkers, the game, or Tic-tac-toe. In Tic-tac-toe, two players of equal ability, if they switch off going in turns, will roughly win at the same rate.
Goldy:
Well, if they know what they’re doing, they’ll always tie.
Nick Hanauer:
Yeah. Same with checkers largely. But in the game of Monopoly, five players of equal ability will not tie. One person will always win all the money. And that’s because it’s in the nature of that game that both luck, path dependence, and compounding will basically dominate the feature of play.
Goldy:
Right.
Nick Hanauer:
And that’s what an economy is in the absence of powerful counter forces in a market-based economy. Both advantages and disadvantages compound over time. And if you run the simulations again in the absence of policies to slow this process down, you will end up with a society where a few people own everything and everybody else owns nothing, which is rapidly what’s happening to the United States of America. Right.
Goldy:
And let’s be clear. It’s not always the same few people that would end up… If every time you run it, you might end up with a handful of different winners.
Nick Hanauer:
Right.
Goldy:
And one thing to be clear about this. First, just to clarify, when we say R is greater than G, we mean, the rate of return is greater than the rate of economic growth. And I think Piketty is right in pointing out that’s generally what happens in market economies over time unless you have policies specifically to prevent that from happening or major disasters that destroy wealth.
Nick Hanauer:
Correct.
Goldy:
Like two world wars and a great depression.
Nick Hanauer:
Yeah, exactly.
Goldy:
Which we’d like to avoid. That’s not the best way to reach a more equal society, but that does work.
Nick Hanauer:
Yeah. And historically what has happened.
Goldy:
Right. Yeah. Right. But the important thing to remember about non-ergodic systems, as you said, it’s path dependence, luck, and compounding. When we talk about Monopoly as an example, the board game Monopoly is actually even more meritocratic than the real economy and a real market economy. And that is because everybody starts in the same place.
Everybody plays by the same rules. For example, every time you pass Go, you collect $200, unless you get one of those little cards that tells you don’t collect $200, but that’s part of the rules. But that’s not true in the real economy.
Nick Hanauer:
And everybody starts with the same amount of money.
Goldy:
Yeah.
Nick Hanauer:
Right?
Goldy:
And everybody starts with the exact same amount of money.
Nick Hanauer:
Right.
Goldy:
But in this world, we all start with different amounts of money.
Nick Hanauer:
I think, Goldy, as I recall when we calculated what the game of Monopoly would be like if it matched today’s distribution of income.
Goldy:
Right. How much money people start with.
Nick Hanauer:
I believe that the person in the top 1% would start with $1.5 million. And people at the bottom, in the bottom decile, would actually start with a negative balance.
Goldy:
Right. They’d owe money.
Nick Hanauer:
They’d owe money.
Goldy:
You’d start to [inaudible 00:22:37] money. You’d be bankrupt from the very start.
Nick Hanauer:
That’s…
Goldy:
The bottom half.
Nick Hanauer:
How much do you start with in Monopoly?
Goldy:
I don’t remember.
Nick Hanauer:
[inaudible 00:22:44] $1,500, isn’t it?
Goldy:
Yeah.
Nick Hanauer:
1,500.
Goldy:
Yeah. Whatever it was. Yeah.
Nick Hanauer:
Yeah. Yeah. But that’s how, again, I think the game of Monopoly is a very good analogy to a human economy-
Goldy:
Right.
Nick Hanauer:
… in many ways. But just imagine if you played it and one person got a million and a half, and you owed everybody money.
Goldy:
Yeah.
Nick Hanauer:
And they said, “Okay, let’s play. It’s a fair game.” [inaudible 00:23:07].
Goldy:
Well, it’s over before it starts.
Nick Hanauer:
Yeah. It’s over before it starts.
Goldy:
Yeah. Also, a Monopoly one. There isn’t this rule where once you get enough money, you get to actually spend it to change the rules.
Nick Hanauer:
Yeah. But in our society, you get to do that too, right.
Goldy:
Yeah.
Nick Hanauer:
Yeah. So that’s why wealth concentrates.
Goldy:
Yeah. To basically summarize it. Wealth concentrates because that’s the way markets worked.
Nick Hanauer:
That’s right. It’s embedded in the intrinsic mathematics of the system.
Goldy:
Right.
Nick Hanauer:
And there is nothing you can do to change that mathematics except employ policy to make sure that it doesn’t happen. So the middle class is a purposeful construction. The middle class was created by policies that ensured that wealth would not just concentrate at the top.
Goldy:
Right.
Nick Hanauer:
And the idea that we can just let the market do what it wants and we’ll have a thriving middle class is just utterly absurd. It has never happened, and it can never happen. It requires policy. Active intervention. Okay. Next.
Annie:
Okay. Patricia. “Dear Nick, I’m beginning to hear from students and faculty peers about investing in cryptocurrency. I don’t understand what it is or how it works. Can you give a quick primer on this emerging phenomenon? Is it really a currency or just an electronic substitute for dollars? Is there ever a chance that crypto could replace conventional dollars? Help.”
Nick Hanauer:
Yikes. Okay
Annie:
Especially that help me understand, but help.
Nick Hanauer:
So this is fraught territory, Goldy.
Goldy:
Yeah. Really?
Nick Hanauer:
And if we talk about crypto, we’re going to get hate mail.
Goldy:
I got a bridge to sell you, Nick.
Nick Hanauer:
Okay. Oh, golly.
Goldy:
It’s called BridgeCoin.
Nick Hanauer:
Yeah. They almost did one of those, didn’t they? Yeah. So, folks, we are not big believers in crypto here at the pod, and there’s a whole bunch of reasons for it. And we’ll go through them in turn. The first is that the value or prosperity in human societies isn’t… has nothing to do with GDP, or money, or wealth, or whatever it is. It is the accumulation of solutions to human problems. So a product has to solve a problem in the world in order for it to create value in the world. And cryptocurrency does none of that.
Goldy:
Well, there’s some things, but mostly none.
Nick Hanauer:
Okay. If you want to buy drugs or guns illegally-
Goldy:
Yeah. That was my point.
Nick Hanauer:
… it is a super-effective way to do that. But aside from illegal activity, there is nothing that you can do with crypto that a bank account and a credit card cannot accomplish at far lower cost with far less risk and consuming far less resources. And the thing about crypto is it’s been marketed in two ways. As both a store of value, a hedge against inflation, and investment like gold, blah, blah, blah, blah, blah.
Goldy:
Which is crazy.
Nick Hanauer:
Which is crazy. Or as a currency that can replace dollars or other Fiat currency, and crypto solves neither of those problems as we have seen. I mean, cryptocurrency is now down, I don’t know, 75% or something like that from its high.
Goldy:
But what they’ll argue is it might be down 70% off its high, but it’s up infinity percent from its low.
Nick Hanauer:
Yeah, that’s true. That is true. But for people, it’s down at this point.
Goldy:
Right.
Nick Hanauer:
And it went down a lot as inflation rose. So it’s clearly not a good hedge against inflation for all sorts of reasons. But most particularly, it’s a terrible way to transact because it can’t be both things, right.
Goldy:
Uh-huh.
Nick Hanauer:
It can’t both be true that you should save crypto forever because it’s going to be worth $100,000 or a million or whatever it is in the future and buy your coffee with it every morning or a car.
Goldy:
Yeah.
Nick Hanauer:
And the truth is that nobody in their right mind wants to take crypto for coffee because, by the time they cash it into dollars, which is what they’re going to need to buy the coffee beans to continue to sell you coffee the next day, the currency may be down 50%.
Goldy:
We talk about inflation being a problem at 8%. Look at crypto. Imagine if the dollar was changing in value by 70% several times a year.
Nick Hanauer:
Yeah.
Goldy:
[inaudible 00:27:46] would mess up our economy.
Nick Hanauer:
Yeah. Yeah.
Goldy:
From one day to another, you don’t know what your dollars are worth. Like, “Oh, maybe I shouldn’t spend them today because they’ll be worth twice as much tomorrow.” Or, “Oh, I better spend it all now because the dollar is plummeting in value.” That’s what crypto is. That’s what it does. It’s not used as a form of currency because it’s impossible to use as a form of currency. It would never work. It would never support a stable economy.
Nick Hanauer:
Yeah. And of course, you know this idea that we don’t have digital currency is nuts. I mean, you’ve got PayPal. You’ve got Zelle. You’ve got American Express. My God. I travel the world, and I can pay for anything by double-clicking the side of my iPhone and pointing it at a device on a table somewhere. It works magically well, and it’s insured, and nothing ever goes wrong. It’s just awesome.
Goldy:
And no matter what, there’s always the government to back it up. You can always use those dollars, electronic or otherwise, to pay your taxes.
Nick Hanauer:
That’s right. And if somebody tries to steals from me, I have recourse.
Goldy:
Mm-hmm.
Nick Hanauer:
If somebody steals your cryptocurrency, you’ve got no recourse. Nothing. It’s gone.
Goldy:
Now, I want to be clear that we’re not dissing blockchain as a technology. It is a tool that has its purposes. You can think, “I’m not going to go into what blockchain is and how it works.”
Nick Hanauer:
And so Goldy, I’m going to piss all over that.
Goldy:
Really? You don’t think there’s any-
Nick Hanauer:
No.
Goldy:
… use to blockchain?
Nick Hanauer:
No. For a couple of reasons.
Goldy:
Well, you’re the VC guy. So explain.
Nick Hanauer:
Yeah. I mean, look. First, the blockchain has been around since 2008 or nine. All right. That’s almost, what was that, 15 years or something like that now? 2008.
Goldy:
Mm-hmm.
Nick Hanauer:
18, 22, 14 years. You show me a powerful technology that’s been around for 14 years where there is no use. Show me a use today for the blockchain. None. Zero. It’s just fiction that this technology is somehow transformational. That’s the first thing. And the second thing is that there’s an incredibly persuasive case that can be made that technologies like the blockchain preexisted-
Goldy:
Yes.
Nick Hanauer:
… the blockchain for decades and can be done a thousand other ways way more efficiently and way easier. The blockchain can do some things, but you can do it a hundred other ways so much simpler, cheaper, and easier. And the idea that we need to consume as much energy as a country like Thailand uses per year to verify transactions via the blockchain is just insane. It’s just completely unnecessary to do it that way.
RFID cards work super, super well, tags rather, work super, super well, as do hundreds of other technologies that are available to do this stuff. So it just… The other thing I think is really worth mentioning is that the people who are promoting the crypto and blockchain, you have to understand these people make money whether it goes up or down. And so, if you’re trading crypto, you are a part of an industry being milked by insiders who are way, way, way, way, way, way, way more sophisticated than you are. Right. I mean, at least it’s not…
Goldy:
But crypto is democratizing.
Nick Hanauer:
Yeah. [inaudible 00:31:19].
Goldy:
That’s what we’re told.
Nick Hanauer:
Not really.
Goldy:
It’s democratizing.
Nick Hanauer:
Not really. Not really.
The people at the top of the pyramid are almost certainly going to come out, and the little people are not. And you know the stock market is a casino too, to a certain extent.
Goldy:
Yeah.
Nick Hanauer:
But there are companies making actual products that are the basis upon which the stock market theoretically operates. I mean, a lot of it is just trading. But in the long run, well-managed companies making really good products tend to win. So none of that stuff obtains in the crypto space.
And in show notes, we’re going to add a link to a very thoughtful article. It was an interview with a University of California Berkeley’s computer science professor named Nicholas Weaver, who’s been studying cryptocurrency for years. His view. Cryptocurrency should die in a fire. So anyway, check it out.
Goldy:
Well, a virtual blockchain fire.
Annie:
Okay. Ray from Instagram. “How are people still saying that inflation is primarily caused by the stimulus?”
Nick Hanauer:
Oh my gosh. Yeah. The inflation is caused by the stimulus thing.
Goldy:
Yeah.
Nick Hanauer:
It’s just so frustrating. It makes me so angry. So the short answer is that the forces of evil, the trickle downers, will always characterize anything good for working people for middle-class people as bad for the economy. They will tie any program, any policy, any norm of behavior that advantages ordinary people as a job-killing big government attack on freedom. And if it’s not inflation, it will be unemployment. It never… It doesn’t matter. This is the heart of neoliberalism that when rich people get richer, that’s an unalloyed good.
When poor people get richer, that has to be a threat to the economy. And this is playing out in this incredibly predictable way, which is just maddening. But let me prove to you beyond a shadow of a doubt that the stimulus is not causing inflation. Is it… In 2022, the year in which we’re in, stock buybacks are on track to hit $1.2 trillion. $1.2 trillion. Now that’s an enormous amount of money. It’s closing in on 5% of GDP.
And it is there are about 145 million working people in… people who work in America. If you took the bottom three quarters, call it 100 million people, 100 million workers, and divide it $1.2 trillion by 100 million. It’s $12,000 per worker. I mean, how many workers are there in the typical family, Goldy? About one and half?
Goldy:
Two.
Nick Hanauer:
What do you think?
Goldy:
Yeah.
Nick Hanauer:
Well, that’s a noble fact. I can’t remember. There are single people, of course.
Goldy:
Yeah.
Nick Hanauer:
But lots of people have two workers. That’s $24,000 for the typical family. Inflation doesn’t exist if you took the $1.2 trillion that’s currently being shoveled into the pockets of people on Wall Street and executives and simply paid workers that money or reduced prices that much.
Goldy:
Yeah. So I think the more obvious answer that explains why it’s not the stimulus is that inflation is happening everywhere.
Nick Hanauer:
Yes.
Goldy:
It’s a global phenomenon. It’s happening across the world. It’s happening in Europe. It’s happening in Asia.
Nick Hanauer:
Yeah.
Goldy:
It’s happening in Africa, in Latin America.
Nick Hanauer:
Right.
Goldy:
It’s happening all over the world, and they didn’t all get stimulus checks. The US did stimulus checks. Now, what did the stimulus do? It prevented people from suffering in the moment because they didn’t have jobs because of COVID. It allowed people to continue to feed themselves and pay their rent.
Nick Hanauer:
That’s right. And it…
Goldy:
Or their mortgages.
Nick Hanauer:
And it almost certainly prevented the United States from falling into just a cataclysmic recession or depression-
Goldy:
Right.
Nick Hanauer:
… where unemployment would be not 3% today but 20% today. And probably prices would not be up as much if unemployment was at 20% today.
Goldy:
Right. But that’s a choice.
Nick Hanauer:
But that would be a different set. Now we’d be talking about unemployment.
Goldy:
Right. And so, all the human misery that would’ve been created had we not done the stimulus. Well, you know what? You’re looking at the rest of the world. We don’t live in isolation. We probably would’ve had that misery, and we’d be having inflation now anyway. Maybe not quite as much as we are now, but still, it’d be… it’d look high to everybody who’d grown accustomed to 1.5% inflation, which, by the way, is not normal.
It may seem normal to people who’ve looked at it over the past 15, 20 years, but that is outside the historic norm. It’s usually quite a bit higher. 3, 4, 5% would’ve been considered okay in most decades. So it clearly was not created by inflation. I will, however, be a little more charitable than you, Nick, in that I’m not going to strike… chalk this up entirely to evilness or intellectual dishonesty.
I think there’s a lot of intellectual laziness involved here too.
Nick Hanauer:
Yeah.
Goldy:
It’s [inaudible 00:37:02] because it is so obvious. It is so… Even the fed is doing this. They’re raising interest rates to try to cause a recession to bring down inflation in the middle of a global supply chain crisis.
Nick Hanauer:
Yeah.
Goldy:
I mean, we all know this is what’s happened is that COVID has just messed up the supply chain, both production, and shipping. Shipping and trucking. That is where a lot of the bottleneck is right now is in moving things around the world. So, now understand what happens when you jack up interest rates. The way it’s supposed to work is it makes it more expensive to borrow money. Who’s borrowing money? It’s mostly corporations. They’re borrowing money to invest in hiring workers and expand… in building new factories, in buying new equipment, in expanding their businesses.
And why are they doing that? They’re doing that to increase the supply. That’s what all of that investment is about. Increasing supply. So what the fed is doing is it is raising the price of the money, the cost of borrowing money, so that they invest less in increasing supply in the middle of a global supply chain crisis. If we really want to solve inflation, we should be investing more in expanding supply and expanding shipping and trucking and rail, et cetera, not invest less. That’s the opposite of what we should be doing now.
But since Paul Volcker went and created those horrible recessions in the late ’80s by jacking up interest rates to unheard of levels, nobody’s wanted to go through this again. And the whole reason why that was done was under the belief that inflation was largely caused by wages going up out of control. So he inflicted those recessions on the American economy in order to create unemployment, in order to break unions, in order to put people out of work, in order to reduce the ability of workers to demand higher wages.
And when I say it’s intellectually lazy, I don’t think that Paul Volcker is a bad guy. I don’t think that Larry Summers wants to hurt people. I think they just believe that’s the only way to control inflation. And it’s not true because what we now understand about inflation, and I think, would you agree, this is now an economic consensus. What we understand about inflation now is that we don’t understand it.
Nick Hanauer:
Yes. Correct.
Goldy:
That in fact, it is all about expectations, which are magical and imaginary.
Nick Hanauer:
That’s right. And I actually don’t think we have inflation. I think it’s actually the wrong word. We have higher prices as a consequence of the disruption of the global supply chain. But inflation is a different phenomenon, right. Inflation is this increasing returns phenomenon where wages go up whole bunch and so prices go up whole bunch, and so you need to raise wages in order for people to be able to afford the higher prices. Obviously, that’s happening now.
There are higher prices, which are disrupting people’s lives. And that’s a real phenomenon. But the fed raising interest rates is not going to sort out the supply chain problems of a company in Japan who can’t get enough chips to put in some product that you desperately need for your house. Right. It’s not going to fix that. The only thing that will fix that frankly is time for the global supply chain to straighten itself out. And it will just take a long time.
Goldy:
I do have an alternative theory I want to run by you about what the fed is doing. Why they’re saying their raising interest rates because of inflation. I think that they are taking advantage of inflation to raise interest rates because they’ve been so uncomfortable with historically low-interest rates. It is their only tool. I mean, they have [inaudible 00:40:59]… They’ve been using the quantitative easing. The essentially creating money out of nothing-
Nick Hanauer:
Yeah.
Goldy:
… to try to stimulate the economy. But I think when you’ve got interest rates near zero, and they do not want to do negative interest rates. And let’s be clear, other countries have done that in the past. After the financial collapse, a lot of central banks went to negative interest rates. The fed never did. They got just about to zero.
I think that they want to get interest rates up because they have been A, historically low for a very long time. And it gives them very little room to maneuver because you can’t cut… when your interest rate is around 1%, that’s all you can cut in case you want to stimulate the economy. So I think that’s part of what’s going on here.
Annie:
Okay. Last one. Vitorio. “What does every single person out there do right now to make the biggest change needed today?”
Nick Hanauer:
Oh, golly. Yeah. Well, I mean, I think first and foremost, vote. I think that the choices could not be starker right now.
Goldy:
Mm-hm.
Nick Hanauer:
You’ve got the democratic party, and you’ve got the undemocratic party.
Goldy:
Right.
Nick Hanauer:
And if you want to continue to live in a democracy, we would urge you to vote for the party that’s in favor of it.
Goldy:
Right. We’re not saying Democrats are perfect, but this is the choice at the polls. And there was one party out there that is literally trying to undermine our democracy and replace it with… They might not understand that they’re fascist, but essentially a fascist. [inaudible 00:42:41] is dictatorship.
Nick Hanauer:
Yeah. Right.
Goldy:
They want a system, a strong man system, like in Russia.
Nick Hanauer:
Yeah.
Goldy:
And so does Russia.
Nick Hanauer:
Yeah, exactly.
Goldy:
Russia would like that here as well.
Nick Hanauer:
Exactly.
Goldy:
And that’s not good for the economy. It just isn’t. Concentrating power, that way, you’re not going to have a thriving market economy in a fascist state. In the long run, it’s not good for anybody. And, of course, why would you want to live under that system?
Nick Hanauer:
Exactly. It’s great for the [inaudible 00:43:05] but-
Goldy:
Right.
Nick Hanauer:
… not for anybody else.
Goldy:
Yeah. But obviously, that’s not the only thing. We urge you to vote and not, More and Better Democrats. That was the slogan of the Netroots and in the odds when I was a blogger. And it recognizes that, “Oh my God, there’s a lot of problems with the democratic party.”
Nick Hanauer:
Yeah.
Goldy:
But it’s better than the alternative. So you have to get involved, and at the very least, vote. Do not just throw up your arms and say, “Everybody’s bad.” It may be a choice between two evils, but there is a lesser evil.
Nick Hanauer:
Yeah. The other thing is that I do feel that we are making really good progress on the sort of cultural understanding of economic cause and effect and the narratives out there. And I use this by way of example. And here in Washington State, we passed for the first time, I don’t know, maybe in the state’s history, an actual progressive tax, a small tax on the capital gains for families who get cap gains above $500,000 in a year, which applies to, I don’t know, 1% of Washington State citizens or something like that.
Goldy:
It’s less than 1%.
Nick Hanauer:
It’s a few thousand families or something like that. And 10 years ago, after… either during the conversation leading up to the passage or after it, the press would’ve been filled with stories about how this was a job killer and it was going to destroy the economy. And the rich were job creators, and the more money they had, the more jobs they created. And there was none of that. None of it because those are lies.
Those claims are just not true. And we have defeated those claims largely, certainly in the state and to a certain extent, nationally. The trickle-down lies, people just are not buying it anymore. And that is progress. And so when you are out talking to your friends and family about these lies, that’s helpful, right.
Because over time, you can sort of reset the cultural common sense around economic cause and effect. And as a consequence of that, we will get better policy. As the political system, hopefully, begins to respond to what people actually want if we continue to have a democracy, which is an open question.
Goldy:
Right. And the economy is a reflexive system in which what we believe about the economy actually changes the economy. It actually changes things on the ground. If we believe that a more inclusive economy is a more prosperous economy, that the middle class is the source of growth and prosperity, not the consequence of it, then we will act in ways that change the economy to actually function that way.
And when the economy functions that way, it’ll change what we think about the economy in a virtuous cycle. So, in the end, I think Vitorio, that the best thing you can do right now that any single person can do right now is tell people to listen to this podcast.
Nick Hanauer:
Yeah. So, Goldy, it’s always so fun to respond to our listeners’ questions, and we got some super good ones this time. It was really fun.
Goldy:
Yeah.
Nick Hanauer:
Interesting. But the pod is going to go… we’re going to go on hiatus for the summer for a couple of months. We’ll be back in September. We’ve never taken a break, and we’re going to hopefully bring some really cool new things to the pod in the fall. But in the meantime, if you want to ask us question, call, leave a voicemail at 731-388-9334.
Goldy:
And one final thing, Nick, we just need to thank Annie, who is leaving us. This podcast never would’ve happened without her, or it might have happened, but it wouldn’t have been nearly as good.
Nick Hanauer:
That’s right.
Goldy:
So thank you, Annie, for everything you’ve done for the podcast and everything else in making Civic Ventures work.
Nick Hanauer:
Annie you’re the best.
Annie:
Thanks guys. It’s been really fun and I’m proud of what we’ve made.
Speaker 5:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to subscribe, rate, and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer, follow our writing on medium at civicskunkworks, and peek behind the podcast scenes on Instagram at Pitchfork Economics. As always, from our team at Civic Ventures, thanks for listening. See you next week.