Are the Central Banks Getting it Wrong? — with Danny Blanchflower

Danny Blanchflower, a professor of economics at Dartmouth College and a research associate at the National Bureau of Economic Research, joins Scott to discuss the state of the economy, the imminent recession in the US, and why he thinks the Fed is relying on “guessonomics.” Follow Professor Blanchflower on Twitter, @D_Blanchflower. Scott opens with his thoughts on Apple sponsoring the Super Bowl and the company’s decision to move iPhone production away from China. Algebra of Happiness: diversification matters. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

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• 0:48Speaker 01

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• 1:18Scott Galloway?

  Episode 199. The Matrix remade in 1999. Serena Williams won her first Grand Slam title in 1999, and Apple released the iBook laptop in 1999. True story, Keanu Reeves and I are good friends, just not with each other. The Matrix, red pill or blue pill? For me, it's the little blue pill. Something about having sex on Viagra makes me recite lines from The Wizard of Oz. Either surrender, Dorothy, or I'm melting. Go, go, go!

• 1:55Scott Galloway?

  Welcome to the 199th episode of the Prop G Pod. By the way, 199th episode, Adam Altman, my colleague at NYU, says that the most dangerous birthdays are the nines. When you're 29, 39, 49, you start reevaluating your life and you're more likely to go buy a sports car or kill yourself. I'm actually feeling fine. Don't worry about me. Anyways, on today's episode, we speak with Danny Blanchflower, the Bruce V. Rana Professor of Economics at Dartmouth College and a Research Associate at the National Bureau of Economic Research. We discuss with Professor Blanchflower the state of the economy and why he thinks central banks are getting it wrong when it comes to monetary policy. All right. What's happening? The big news? My fourth book, dun dun dun, has officially been published.

• 2:36Scott Galloway?

  It's called Adrift: American 100 Charts, and it's all about the nation's prosperity and perils over the past several decades. It also covers what we believe can be done about what matters, including a consistent transfer of wealth from the young to the old, the inequalities between capital and labor, and improving pathways for upward mobility. I sound like a bad version of AOC or Elizabeth Warren, which Senator Warren or Representative Alexandria Ocasio-Cortez. Anyways, when did I go left? You're supposed to go right as you go older. Anyways, maybe it's because the right has gotten so bad shit fucking crazy. Just my view. Let's get Daddy a bestseller and please buy the book. Buy the book and I will surround you with white light.

• 3:18Scott Galloway?

  I am trying to write a book every 15 months because I've decided that I would like to live a long time, and I think part of aging gracefully or just not dying is to be physically and mentally stimulated. I try and work out a lot and I try and challenge myself, and I believe, or for me at least, writing books is the most difficult thing that I do professionally. There's a lot more personally, I find, relationships, being a good person is much more difficult than that, but professionally... I think writing books is really challenging. Okay, let's check in on the world's most valuable company, Apple.

• 3:51Speaker 02

  Hello there.

• 3:52Scott Galloway?

  The Cupertino firm's Apple Music is sponsoring the Super Bowl halftime show. Get that? Stand back so I can kiss myself. Color me surprised. Apple is sponsoring the Super Bowl halftime show, replacing Pepsi, which has been the lead sponsor for the past decade. The deal is reportedly worth $50 million, and this comes as Apple has been encroaching on the digital advertising space. Apple is making an unusual move here. The firm rarely gets involved with events outside of its own product launches, and The Times noted that the last time we saw Apple sponsor a high-profile event was in 2016, when it sponsored the Met Gala to give the Apple Watch some hype in the fashion world. This absolutely just frickin' blew my mind. I've been talking about for the last 10 years

• 4:37Scott Galloway?

  that the most valuable companies in the world have one thing in common, and that is they're exiting broadcast advertising. And then Apple, the most valuable tech company in the world, shows up and goes Super Bowl halftime show. I mean, oh, my God. Cats living with dogs, it's raining frogs. I don't get it. What I'd be really curious to know is if the Super Bowl or the folks at the NFL gave them a discount to try and feel younger again? Because there's something about just selling salty snacks and Big Gulps and Dunkin' Donuts through the Super Bowl that kind of says, we're old and we don't get it. I wonder if they gave them a discount to try and feel young again? That Apple's sort of the Botox to the advertising that is the Super Bowl, where they just have a bunch of frogs yelling at each other, trying to get you to buy beer?

• 5:18Scott Galloway?

  Anyways, the 2021 Super Bowl brought in 96 million viewers, the lowest number since 2007. It sounds like a lot to me, but still, that's the lowest number in 15 years. The NFL and Apple have also been in talks over NFL Sunday Ticket, a subscription package that gives access to every Sunday game live and bypasses any broadcast channel restrictions. We've been saying this for a long time, that it was only a matter of time before Big Tech went after sort of the last. Bastion, if you will, of broadcaster ad-supported media and that of sports. It costs around $400 for full season access to NFL Sunday Ticket. The NFL's asking price for this asset, get this, $2.5 billion. Apple, Amazon, Google, and Disney are actually all in a bidding war over acquiring the rights

• 6:03Scott Galloway?

  for this programming. Apple's free cash flow, however, if they want it, they're going to get it. Why? Because their free cash flow over the trailing 12 months is $108 billion. That's their free cash flow, not their GAAP earnings, not their profitability. How much cash, how many Benjamins actually came into the, to the company there? Amazon's free cash flow was negative 30 billion. Google's free cash flow, 65 billion. I'm stuck on Amazon's free cash flow, negative 30 billion. I guess they've been making big investments because they're still growing. I don't know. Google's free cash flow, 65 billion. Disney's free cash flow, get this, 1.2 billion. So what do you have here? What do you have? Apple has almost 100 times the free cash flow of Disney. Mind blown.

• 6:44Scott Galloway?

  NFL games accounted for three quarters of the top 100 most-watched TV programs in 2021. The NFL currently has an 11-year, $13 billion deal with Amazon to stream Thursday night games. So the thing here, in addition to man bites dog and broadcast advertising welcoming back a big tech asset here, it strikes me, reading this, that the NFL has for a long time been considered the most successful league in the world, even more successful than the Premier League, or UEFA, or the MLB, or the NHL, or NBA. A lot of acronyms here. And a lot of people, there's a lot of interesting things around the NFL. But the thing I've always found is why, or I like to point to as a big component of the NFL's success, is the draft.

• 7:29Scott Galloway?

  Or specifically, they ensure that every team has a shot at getting into the playoffs at some point. And if you look at, I don't know if it's the 28 or the 36 teams, I know very little about football, but almost all of them have been in the playoffs in the last decade. They don't like franchises, and I guess it happened with the Patriots, or I guess any team that had Tom Brady became a franchise sort of overnight. But the whole idea is to create competitive juices or competitive, create competition. I think it's a great metaphor for why we need more competition in the real economy. Or in the business world because competition creates innovation and it creates incredible loyalty across America and people always want to go to football games because there's a shot that this

• 8:12Scott Galloway?

  year their team might go far, but I think they do a great job. Also, I think they're really profitable because they don't have as much extraction of profits from their players. Why? And I don't have evidence of this, but I it's a thesis because they're forced to wear helmets. No NFL star can really break out as commanding that much power. They're one of 40 players, I believe, on a playing roster, so they don't have the same leverage, although I guess they have to pay 40 people. Maybe that breaks down. I don't know. What else is happening with Apple? The firm announced it will manufacture the iPhone 14 in India, moving production away from China. This is a big deal. Supply chain is what moves the needle here. And I got to imagine over the

• 8:55Scott Galloway?

  last year, even the last two years, a big strategic blinking neon item or box that Apple wants to check is we need to diversify away from China. Now, can they diversify away from a demand level? They probably don't want to do that as long as the Chinese want to want to continue to be the biggest market on a demand side. They're down with that. But on a supply side, it is very dangerous to be this dependent on one nation that can go into a zero COVID policy and shut down. It is it is that dangerous to have a nation that is geopolitically unstable or its relationship with the United States is geopolitically unstable. So Apple is doing what a lot of firms are doing. I was on the board of a specialty retailer, Urban Outfitters, for

• 9:37Scott Galloway?

  four years, and we woke up one day and realized that a disproportionate amount of our skis were coming out of a small region in China. And we had gotten so lazy or corporate America had gotten so lazy around just pursuing the lowest cost provider that we didn't take into account. We didn't do any scenario planning, but what happens if for some reason that one central source of supply gets interrupted? And so you're going to see a lot of focus on making the supply chain more diversified, more heterogeneous. And I think you're going to see Vietnam be a big winner, Mexico be a big winner. And in this case, it looks as if India is going to be a big winner. Tim Cook is a supply chain guy. He's probably, I don't want to say he's not compelling because he just sort of reeks of integrity, but he's arguably the first sort of supply chain person, I would argue,

• 10:22Scott Galloway?

  to take over a big tech company. He's not a technologist, he's not a marketer, he's a supply chain guy. JP Morgan analysts expect Apple to produce a quarter of its iPhones in India by 2025. That's a lot. They also estimate that about 25% of all Apple products, including the Mac, iPad, Apple Watch, and AirPods, will be manufactured outside of China by that same year. Currently, just 5% sits outside of China. Why are you mind blown? There's more employees of Apple in China than in the United States. So, one word I didn't, I didn't think enough about, or one concept I didn't adopt early enough, and it's true across every investment decision, every business decision, you want this word

• 11:05Scott Galloway?

  in the back of your brain, and that is the D-word, specifically diversification. In 1999, I was wealthy in my early 30s, and I thought, well, it's because of my genius. Well, okay, genius. The market is bigger than any individual or any one person's genius, and by the middle of 2000, after the dot-com explosion, I was no longer wealthy. And why? Because I was not diversified. I had all of my assets, or all of my eggs, in one basket, specifically a company called Red Envelope. And by 2007, I'd clawed my way back, and then I got hit very hard again because I had all of my assets in tech. I was more diversified, but still not diversified enough. I got hit pretty hard in the last year with

• 11:49Scott Galloway?

  the drawdown in the markets, but I lost 20, maybe 25% of my net worth. Why? Because I finally learned the D-word. I was diversified. Diversification is just a basis of biological health in the ecosystem. You want to be around different people, you want to get different viewpoints. Diversification, learn it early. Yeah, give up some upside, maybe you're a genius, maybe you want to double down on this one stock. The market is bigger than any individual's genius. You can be, you can pick a great company. Market dynamics trump individual performance. Diversify.

• 12:26Scott Galloway?

  We'll be right back for our conversation with Danny Blanchflower.

• 12:31Scott Galloway?

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• 13:16Scott Galloway?

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• 13:34Scott Galloway?

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• 14:19Scott Galloway?

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• 14:49Scott Galloway?

  Welcome back. Here's our conversation with Danny Blanchflower, the Bruce V. Rana Professor of Economics at Dartmouth College. Professor Blanchflower, where does this podcast find you?

• 15:00Speaker 03

  How did I find you? Pretty good, actually. It's where I live here. First day in about 10, it stopped raining. It's raining on the rest of the world and hurricanes coming in the south, but this is, this is interesting days.

• 15:15Scott Galloway?

  Are you at Dartmouth? Where are you?

• 15:17Speaker 03

  I'm at Dartmouth. Yeah, I'm just down the road from Dartmouth.

• 15:19Scott Galloway?

  Got it. And just off mic, before we started, you said that the economy is in shambles. Give us your state of play right now in terms of where we are. Let's start with the US and then try and provide some context for the world.

• 15:32Speaker 03

  The thing that strikes me very much in the discourse is how much certainty there certainly appears to be amongst policymakers, especially those at the Fed, and much of the commentary. It appears that people seem to think they know what's going on. I think the view is that the US economy, my predictions, and I made a series of predictions last year based on consumer confidence, was the US entered recession at the start of 2022, as it did in 2008. And a lot of what we're seeing, especially raising rates, is going to plunge the world and the US into a deeper recession. And I think what's interesting in a sense is the group think, and I experienced that in 2008. And if you look in September 2008,

• 16:15Speaker 03

  when Lehman Brothers fell, nobody, including the US or the MPC or anybody else, had worked out that the world had been in recession for nine months, and they thought inflation was the big deal when it wasn't. And that seems to me to have a lot of similarities to it. But I think what we should be hearing are different voices. I mean, if you think about this, we've never seen anything like this. The only time we've seen this was actually in the prior centuries. I think in the last century, we had a great war, followed by a pandemic, followed by a crash. What we've had now is a crash, followed by a pandemic, followed by a war. And those shocks and the precedent for that seems important. It seems to me that we should be having a lot of voices saying, we don't know what's coming. Here's

• 16:58Speaker 03

  a whole series of scenarios that the world could see, but they're all in the position where we've got to raise rates because we're worried about inflation being high in the future. If you look at it historically, there's no examples historically where that is actually true. The following, the most likely outcome coming is actually deflation. So that's a real possibility. And then the second thing is that if you look at what happens in the UK, we've seen complete and total meltdown and chaos from a government who did something on Friday, which was I've never seen anything like it. And we're in the position where the Bank of England is having to fight to say this is so bad that we probably need to have an emergency meeting to raise rates. And the government doesn't want them to do that because it would be an indicator of what's coming.

• 17:42Speaker 03

  So I, so I think we're in, we're in chaos. I think recession is going to be much deeper than people think. But I think the big deal is just like in two thousand and eight, there's been serious group think.

• 17:54Scott Galloway?

  So a lot there, professor. Let's start off. You think we're due for a two thousand and eight like recession in terms of severity?

• 18:01Speaker 03

  Well, it certainly seems so. I mean, the claim, the claim, the laughable claim from Fed officials that what they're doing can generate a soft landing is a joke. I mean, there's no basis in any evidence whatsoever for this. So if you start to raise rates as they've been doing, what that generates is a recession caused by raising rates. I mean, if you're going to argue that you're doing it because inflation potentially is going to be really high. Let's go back to July oh eight. And I've got other much better data even than that. It's July oh eight. They said the same things. If you go and look at what Fed officials said in July and August two thousand and eight, they said, you've got to worry about inflation.

• 18:47Speaker 03

  On the committee that I was on, there was even votes to rate, raise rents and that this is really the big issue. Well, five point six percent inflation in July oh eight. In July oh nine, inflation was minus two. So that's the first thing. The second thing, if you go back historically and you look at any of these major supply shock events, so the, we've actually got data to the Black Death, to the Great Influenza, when the, when the big volcano erupted in, in Asia and then in the eighteen, in the nineteenth century, there was a, a summer that basically had no summer. After all of those events, the follow up was high, high food prices and then deflation. And if you look, I think there was very great likelihood in the US that by June inflation

• 19:32Speaker 03

  will be well below two. And these guys have generated a recession and all the story in the UK, if the central bank in the UK has to have an emergency meeting, raise rates. The economy in the UK and in the US are already in recession. So I think, just like in the past, they make an error. I mean, it's probably the most plausible outcome, that they're raising rates in a recession. And we've already seen two negative quarters of growth in Q1 and Q2. The German recession, the eurozone recession, China at its weakest. So the plausible outcomes are that the Fed has got it completely wrong again. The idea that they can generate a soft landing, I teach my students that we study economics and they appear to be studying guess economics.

• 20:17Speaker 03

  I mean, there's nothing, basically their policies are based upon nothing more than wild guessing.

• 20:22Scott Galloway?

  Yeah, there's this, it feels as if everybody's hoping for and putting too much confidence in the notion that they can absolutely stick the landing, like slow the economy just enough.

• 20:32Speaker 03

  Exactly. Well, let's hope they're right. Let's hope they're right, but that's just guessing. I mean, much of the stories that I hear and the commentary, so you know, I sit lots of times in the debate with these people. So I say stuff like, well, how do you know that? I mean, just try the question, how do you know that? What's that based on? And they cough and they say, oh, we looked at this. And you say, well, have you any historical precedent of anything like this? And they say, no. I mean, you listen to things like, we're going to look at the VU relationship, Jay Powell says, what? That's an absolute joke. Has, I mean, if we could talk more about it, it has the wrong, it has the wrong sign for things that they're saying. The VU relationship, he says, oh, there's all these vacancies out there and that means there's going to be a soft landing.

• 21:15Speaker 03

  Well, sorry, because that series rose strongly since 2010, which predicts high wage growth during the period 2010 to 2020. And we got soft wage growth and it's negatively correlated with wage growth. So how is that going to, how is any analysis of that going to tell you about a soft landing? I mean, I'm not saying, I'm not saying that I'm right at all, but I'm saying that my scenario is at least a plausible one, probably more plausible than theirs. So why aren't they considered? And you can probably think of five others, which are equally plausible. So given that they're all thinking the same, that exposes the US and other countries to a major downside risk. Think of China, China's growing slower than it's done for the last 40 years. So let's try and think about what these plausible scenarios are.

• 22:01Speaker 03

  And the largest economy in the world, the UK, is collapsing before our very eyes.

• 22:06Scott Galloway?

  So let's talk about historical precedent. My understanding is there is no historical precedent for raising rates this fast and not going into recession. And then, one, first, two-part question. First, do you agree with that? And then, two, is a recession the worst thing that could happen? Or is trying to do anything to engineer an avoidance of a recession, just creating more underbrush that when we do have an imminent recession, we have a super fire?

• 22:34Speaker 03

  Well, the evidence, first of all, is that, yes, when the Fed does this, and when the Fed, we get to the end of a boom, if you like, and then the Fed starts to raise rates. They do it too much and they generate a recession. So that's the first thing. The second question, well, the second question is what, what happens if you just let this thing naturally kind of fold along and sort itself out? It's the sort of zombie firm argument. The view that I've always taken is that the problem is we don't know which zombies, which firms are zombies and which are not. And the problem is certainly in 2008 and during the eighties, what happens is it takes out non-zombie firms as well. But I think the evidence also is, I mean, I've done a lot of work on this, as have others.

• 23:16Speaker 03

  And again, the Fed and others guess, they say, okay, inflation hurts you. Well, I was actually commissioned by the Boston Fed to go and think about that and to try and think about what's the cost of doing that? What's the cost of just leaving inflation? What's the cost of the bad inflation compared to the alternatives that you create? So there's a literature on that. And the evidence is that a one percentage point rise in unemployment, which is kind of what you talked about, a one percentage point rise in unemployment is basically 10 times worse in well-being and pain terms than a one percentage point rise in inflation. So the problem is that you, you try and solve the inflation problem, but we measure this, we measure it in data where we ask people, how do you feel?

• 23:58Speaker 03

  And it turns out that the danger is that, you know, you, you just basically destroy the economy by trying to fix inflation. And the story that I think, and I have some great data on this, the traditional story actually with inflation is inflation actually goes away. The likelihood is that when inflation rises, naturally, consumption declines, people move away and inflation falls. So I have the greatest data series in the world. The Bank of England produces a series of inflation for the UK back to 1210. Now, you can argue about what was data collection like in 1232. But basically, over the last 820 years, so 820 observations,

• 24:42Speaker 03

  of those, 340 are deflation. So the natural response for an inflationary shock and after a large inflationary shock, the natural response is a deflationary shock, which is what we saw in 2008. And of course, it's not as if there's nowhere advanced country that looks like that, because Japan looks like that now. And it basically has gone over the last decade or so. It's gone between, you know, plus 1% inflation and then minus a half a percent. It's gone back and forth. So there are historical precedents for this. And it seems to me that if you just go to those data and you might quibble about it, and you might say, yeah, the amplitude of cycles has come down. But there is no evidence historically anywhere for high inflation.

• 25:27Speaker 03

  Then the central bank deals with it and it gets quite high inflation and it takes a while to come down. In the historical record that Powell and the other people are talking about, there is no example of what they say. There are no historical examples of it.

• 25:43Scott Galloway?

  So based on your body language, my sense is you think that the Fed is raising rates too quickly, that they've been too aggressive, that inflation is a self-correcting mechanism in an environment like this. Is that correct?

• 25:55Speaker 03

  Yeah, I think so. I mean, let's again say, I mean, would you say to me I'm 100% certain of that? Is this the central thought? No. Could this be wrong? Of course. But is that a plausible scenario? And the answer is yes. Not least because over the last two months, what did we see? We saw inflation of zero and zero in the seasonally unadjusted estimates and zero and 0.1 in the adjusted one. Everything is driven currently by the base effects, right? The base effects are what's driving things. And we know, we know what's going to happen as we move forward. I mean, if you get 10 more zeros, that means inflation zero. That's just how it works. So I think if you look at plausible scenarios like back to 2008,

• 26:40Speaker 03

  or you simply say, so if you do something simple, like let's take The average per month that we saw between two thousand twelve and two thousand nineteen, and just take that for the next ten months. Well, that gets you to inflation of below two in June.

• 26:56Speaker 03

  The possible scenario and the plausible scenario is actually that we get there much faster. So I was looking at two or three numbers this morning. The first one is oil prices. So now oil prices have gone below eighty. Second thing, which I think is pretty interesting, is that we I watch a series called The Drury Freight Container Index, which is the price of shipping a forty foot container between Shanghai and Los Angeles or Rotterdam to, you know, you know that series. Okay, that's down ten percent this week, ten percent this week. Um, and it's down, it was at about ten thousand five hundred in October and at about nine thousand in March. It's four and a half thousand today. Timber prices are tumbling, um, commodity prices are tumbling.

• 27:41Speaker 03

  So if that's the case, how does that generate a burst upwards in inflation? Unless there's another shock. I mean, I understand if there's another shock comes, if there's another Covid wake up. But this is all dependence. I mean, once the two shocks have gone, inflation is going to drop like a stone, as it is. So we've got two months of zero. For the next month or two, the numbers that dropping are quite small. And then we get giant numbers that drop out. So you're going to see months where the inflation drops from six point seven to five or six point seven to five point two, even if we get something very normal. And in a deflationary period, we might well see months of minus one. So I think the most likely scenario is that they've got it completely wrong.

• 28:25Speaker 03

  The problem is not inflation. What you've generated is a horrible recession. And and the other thing that I've read the whole series of papers on, the one thing that predicts recession is consumer confidence. Consumer confidence data predicts all of the last six recessions called by the N B E R. And these data by about by about the middle of last year were looking much worse than they looked in oh seven, which predicted the recession in oh seven. They were completely consistent with recession being called for the first two quarters of twenty twenty two. And we've got two negative quarters already. So it's pretty interesting that Fed says we're not in recession when we actually have data which is two negative quarters already. And it doesn't make any sense. If you look at their forecasts, they're actually forecasting,

• 29:09Speaker 03

  as far as I can tell, I think those numbers will get revised to minus one. I think we'll have a half a point fall for Q3. And they're forecasting that the quarterly growth in Q4 will be plus 1.7. I mean, this is Gargonland economics.

• 29:24Scott Galloway?

  Well, in addition, I've been, I've been thinking a lot about this, and none of us have a crystal ball, but in addition, in addition to deflationary pressures of lower energy prices, lower commodity prices, dampening demands or increases in interest rates. If you look at just America, isn't the Chaser effect to a deflationary force, the fact that the dollar has surged so dramatically that all of our prices are about to come down?

• 29:50Speaker 03

  Absolutely. So the way I always thought of it was when I was on the Bank of England, one of the big, I mean, I was probably the person in the world most screwed by movements of currency. When I joined the Bank of England, I was paid in pounds and the exchange rate was two to the dollar. And I worked really hard to talk pound down. By the time my left, it was at a buck fifty. I gave myself a giant pay cut. But the declining currency is a stimulus to the economy because it, you know, it stimulates exports. All my students are rushing over to England because it's a really cheap place to go today at a buck seven. But you're right. So what's, but there's two things going on. Actually, I would say the second one we'll get to. The first one is the tightening of the currency, the strengthening of the currency

• 30:32Speaker 03

  is equivalent to a fiscal tightening, right? But the other, but the other thing is that what the Fed has done is it's not just, the tightening that's come from the Fed, it's not actually about so much about what it's done. It's what it said it's going to do. And then it's pushed the price of mortgages upwards because the yield curve thinks that more interest rates are coming. So, so I mean, when you're looking at the price of mortgages up in the six percents or so, that's just because they signaled to markets that more, that more rises are coming. So the, so the tightening in the marketplace and the rise in the currency have basically tightened the economy into recession. I agree with that. So I agree with what you said, but I think the other tightening is, is, you know, think

• 31:15Speaker 03

  about the mortgage market, the housing market in the UK, and it's just about to collapse.

• 31:20Scott Galloway?

  But should I add a couple of things? One, I'm going to just be a few questions out here. One, I'm not sure that the real estate market cooling off is necessarily a bad thing. The other thing is, I would argue the Fed is faced with sort of Sophie's Choice. It's either inflation or recession. And my sense is their fear of inflation has outweighed their fear of recession. And it sounds to me like you.

• 31:42Speaker 03

  I think that's a complete mistake, though. So let's think about why is that? Let's, I mean, I agree with you. So let's think about, I'm actually writing a paper on exactly that right now. So what's the fear?

• 31:54Scott Galloway?

  Was it why my republic fear? Isn't it fear that the fastest way to a revolution is everybody's quality of life plummets because of runaway inflation? Isn't that the fear?

• 32:02Speaker 03

  No, I don't think so. I think, I think the worst thing we've seen in our lifetimes is because communities get destroyed by unemployment. I mean, we haven't seen hyperinflation outside, you know, Italy and Germany since the 50s. I mean, none, no advanced countries actually seen that. So I think we know what to do about that. I mean, let's just go back. I mean, I don't, I mean, I understand that, but I mean, unemployment of 10 and 12% in the community. It turns out in, turns out in well-being, as we measure it, and that's, and that's what the reality is in the last 50 years. I think the fear, and I remember being at the Bank of England and having the same arguments, which I thought were tosh at the time. The argument is that there's going to be a wage price spiral.

• 32:45Speaker 03

  Well, there were never, there never really was one. I was looking at the data for the 70s and inflation was up in the 30s.

• 32:52Scott Galloway?

  What about the 70s and 80s in America? Like, because supposedly Chairman Powell's hero is Volcker.

• 32:56Speaker 03

  Now, actually, the data is quite surprising. If you look at these data, you don't actually get giant wage rises that you thought you might, that we thought we had. But let's just go with the story. So, so Volcker comes in and says, okay, this is inflation. We worry about wage increases and people say that this is the world that's recoming. But let's get real here. I mean, I'm a European and it turns out what, what the crucial thing was actually not Reagan and not Thatcher. It was actually 1968 Paris riots. So the Paris riots scared the, the republic to pieces. And from the period from about 1968 on through the 1970s, unionization rates around the world exploded upwards.

• 33:37Speaker 03

  I mean, just exploded upwards in the UK. That was true. You saw all these strikes and other things going on in three day weeks, just like you see here. But unionization and union power was exploding around the world. And that, in a sense, was what the fear was, that these union guys would be able to bring the economy to a halt. So you take on traffic controllers and all sorts of, I mean, in Britain, Thatcher took on the miners and so on. But now we're in a position where private sector unionization, which were a twenty odd percent in those days, is now below six. And many states, including Utah, South Carolina, North Carolina, have rate private sector unionization rates in the twos. So if you say the big reason we have to do all of this is because of exploding worker

• 34:21Speaker 03

  power, well, the first thing is that that's not true. And the second thing is that if you look at the data, wage growth currently is in quite rapid decline, which seems it's about seven percent wage growth of production on supervisory workers at the beginning of the year. It's now falling almost every month to about five, and that generates real wage losses. So if you say, I'm doing this because I worry about a real wage explosion, well, there hasn't been one. So you really think there's one about to come when workers aren't in unions, they don't feel power. What you're seeing around the world is a little bit, are some strikes where people say, prices are going up by ten percent and you're offering me two percent. And in the UK, you say, but I'm also prepared to allow bankers bonuses to go up in the millions.

• 35:06Speaker 03

  So that's, so in a sense, the strikes are, I can't even keep a standard of living I had last year. So I think the idea that you're doing this because of Volcker reasons, because there's an exploding wage crisis, I think it's all for the birds.

• 35:21Scott Galloway?

  We'll be right back.

• 35:24Scott Galloway?

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• 36:09Scott Galloway?

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• 36:32Speaker 04

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• 37:02Scott Galloway?

  Yeah, there's one Starbucks in Wausau, Wisconsin, unionizes and everyone says calls a return of labor strength. And it strikes me that labor's, and we've talked a lot about on the show, I think unions are a failed construct. And not because their intention isn't noble, but they just don't work.

• 37:20Speaker 03

  Well, can I say it another way? I mean, there's a famous book called What Do Unions Do? Which is the most famous book by Dartmouth and Long called Richard Freeman. And the big part of that, and it's consistent in what he said, there's a couple of things to say. In the United States and Italy, the worry is that unions and corruption have gone together. Second thing, it's clear around the world that actually unions have a positive pay premium. There's no doubt of that. So your union work is holding constant, everything that moves, get paid more. But the bottom line relates to what you just said. In the book, what they talk about is it's unclear what a theory we should say to us about unions and productivity.

• 38:01Speaker 03

  Right, so in principle, unions could be more productive, right? Unions could actually work on generating lots more productivity, which would pay for the, you know, you have the union work with the work with the firms. In principle, that could happen. And their view is empirically, that would justify the union because the union could say, we work together and we know the way to make this process more productive. The evidence is, considering what you said, that they haven't really done that. And especially in the public sector. So the public sector has been a big issue. But in principle, and what were unions set up for? Unions were set up as friendly societies. So imagine that they do things like buy health insurance or they buy, I mean, they used to, you know, they they used to be places that if someone got sick, that the union would look after them.

• 38:45Speaker 03

  So I think they've lost, they've lost its its other purpose. But in principle, they could do that, but they haven't.

• 38:51Scott Galloway?

  The, I I want to switch gears here and I'll put forward a thesis and I want to, I want you to tell me if you agree or disagree. So we don't know each other. I just moved to London a week ago. And I moved to London and Prime Minister Truss passes this economic plan that where basically they've eliminated the top tax rate and but they didn't figure out a way to fund it. So they've decided to give money, as far as I can tell, to the rich and increase deficits. So sort of, as far as I can tell, it's very much trickle down economics, which in my view, leads to income inequality, polarization, class warfare, and I'll make a big leap, insurrection. It's as if Britain has learned nothing from the United States over the last forty years.

• 39:35Speaker 03

  I agree with all the things that you've said. I've written a lot about it, I've had a whole series of, I've probably written twelve or ten or twelve op-eds about this. I mean, the thing in a way, it's not even so much that you haven't learned from it. This this prime minister was elected by a vote of eighty one thousand people who live in Kent. Right, that that's, I mean, remember, Biden was elected by eighty one million people. And she was also elected by twenty percent of the Tory MPs. So you go and do this thing and you have an uncosted, I mean, all the things you say are true, but normally what people like me would have to be able to do is to say, if you believe there's trickle down economics and you believe in the Laffer curve and you say, here are these tax cuts, what you have to say is, here are the tax cuts, this is what it's going to cost me, you know, but here's the revenue stream that I'm going to make.

• 40:19Speaker 03

  And you and I are going to argue about the fact that the Laffer curve overestimates the revenue stream. But what did they do? Not only did they do what you said, but they wouldn't even show us the revenue stream. And they wouldn't even fund it. They just said, well, we're not gonna put any, we're not gonna do, we're not gonna, we're not gonna even tell you about it. We're just gonna do it and we're gonna assume it can pay for itself. At the same time, poor people have seen tax increases. And essentially what's coming are more cuts to public spending. I mean, that was said in the last twenty four hours. So I think it's, I mean, and so I think the popularity of this thing is is really in question. And the markets responded horribly.

• 40:57Scott Galloway?

  Hundred, hundred percent. The markets seem to remember or seem to have observed. What's happened in the U S. And I've never seen a currency move like this in a mature market. What does it mean?

• 41:08Speaker 03

  So I was teaching a class yesterday. Um, and we were sitting in the class. It's called, it's called pandemics and financial crises. And we sat in the class and we were gonna look at what was going on. It was an interesting time. We opened the class and the students are really smart. And they said, oh, look what's happened. We saw the pound go to a buck oh three. And now it's gone to a buck oh eight and a half. So I said, well, maybe the Bank of England intervened. Or maybe something's going on. And I said, I hear Chris Giles, I saw tweeted out. It appears that the Treasury and the bank have released them to evidence saying a statement's coming. So halfway through the class, a student says to me, statements come out. So I said, great, what does it say? And I said, well, the first thing I see is it's a statement, not from the M P C who set monetary policy.

• 41:52Speaker 03

  But it's a statement from the governor of the Bank of England. It has the word I in it. And I said, the markets won't like that. And we sat for the next twenty minutes of my class, who got it, my undergrad class has got it. And we watch, and I have it live on the screen, and we watch as the pound ticks down. Two cents in the remaining twenty minutes of the class. And then they come out and say, well, in two months' time, we're gonna try and do an evaluation of it. And the M P C will meet in six weeks' time and think about it. And the government will have another budget in twenty three, in the twenty third of November. I just did an interview and I said. Well, one hour is a long time in economics because that twenty minutes is a long time. And my bet is they don't get to the end of the week without some sort of intervention.

• 42:35Scott Galloway?

  You teach at Dartmouth, I teach at NYU Stern School. By the way, one of my most talented colleagues, Peter Goldner, joined your faculty several years ago. It was a big, a big loss for us. But I, I, I'd love to bring this down to sort of the capitalist mindset. And that is, given these, given these moves, what would you advise investors? Where do you think there's upside or asymmetric risk to the upside? No, understanding no one has a crystal ball. And then what would you advise our students who are graduating this year? How does this impact their decision around where they apply their, their human capital?

• 43:09Speaker 03

  Well, I mean, could you imagine a tougher day to ask that? I mean, I, I, I mean, let's just go a second. I mean, I mean, in a sense that it all looks, it all looks that we're going down. I mean, my power system, it's all going down. We need to be in cash and we need to wait. And then we're going to buy back when these guys have to reverse.

• 43:28Scott Galloway?

  So hard to time the markets, isn't it, Professor?

• 43:30Speaker 03

  Of course, exactly. So I think the rate cut rises are coming. And then I think you're going to see screeching U centers where they're going exactly the opposite direction. The reverse QT, the cut rates, and probably, you know, in the UK, in the end, we're probably going to see more QE coming. So I think that's what's coming. And I think because the macro error that was made is going to be made again. So that would be my guess. I mean, so I was talking to journalists this morning for the UK. And we were trying to think about what's the catalyst that's coming? So think about, say, the UK, say, all the things you say are right, which I agree with. And you say, well, it's a disaster. What, what comes? What does the catalyst for the change? I mean, recession's cut, what's the catalyst?

• 44:10Speaker 03

  I think it's that catalyst in financial markets, probably a catalyst amongst banks, lending societies and so on. But the, but I think that, I, I think there's going to be a set of catalysts, which may well be a really bad day on a stock market. But I, I think we have to start to think about something really bad is coming. And I think that's that's what I'm expecting. I was talking about, well, you know, on the Dow, a 10,000 point drop on the day. But that, in a sense, that's the bottom. That's where they have to all turn around and they they know that it's coming. I mean, in a sense, what changed macro policy at the Bank of England, eventually after a year of me voting rate cuts, what changed it was not Lehman Brothers.

• 44:50Speaker 03

  It was the collapse of RBS changed everything. It's a tough question you gave me. I'm not a stock picker.

• 44:57Scott Galloway?

  Yeah, but you you you've made a call. You've said that in my, unless I misunderstood you, that you think on a risk adjusted basis, you're fairly bearish right now, and this wouldn't be, in your view, a bad time to get out of the market.

• 45:08Speaker 03

  Correct.

• 45:10Scott Galloway?

  So I I just want to go a little bit more personal here or talk a little bit. You have you you've joined Dartmouth. You've obviously spent a lot of time in the UK. Can you compare and contrast? What has been most surprising to you? What observations do you have about the United Kingdom versus America through the lens of higher education?

• 45:30Speaker 03

  Yeah, great, great question. So so I came here in 1989. And the reason I left, I was a young lecturer at the University of Surrey. I got more or less the last tenured job in the country. And I took out a mortgage. And the mortgage interest rate rose to 14% at the start of 1989, which equaled my salary as a lecturer at Surrey. So the president of Dartmouth eventually called me up and said, Danny, I'll quadruple your salary. So so I came to the United States and I worked a lot on the UK. And eventually Gordon Brown asked me to

• 46:05Speaker 03

  come on the MPC. And one of the big things I actually noticed, and in fact, Rachel Lomax, who I thought was great, who actually said to me, the biggest mistake the MPC made, he said, was to not listen to you about the United States. And what I noticed in 2007 especially, and then moving into 2008, was basically what happened in the United States happened in the UK six or so months later. And if you think about it in financial market terms, it was a sort of eye opener to me. The second largest Dartmouth club. Alumni club, the first largest is in Wall Street. The second largest is in Canary Wharf down the road from where you are.

• 46:45Speaker 03

  And I gave a series of talks to my Dartmoor students and I remember talking about Mervyn King would say things like, America's irrelevant. What matters is Europe. And I gave these events and I suddenly realised that all the faces in my audience were Dartmoor students, Dartmoor alums. Who were on leave in a financial institution in London, from a financial institution in Wall Street. And they were same firm. So the first thing that got me was that I kept saying, well, any financial crash in the United States is gonna, it's gonna come to the UK. So I thought that and I still think that. Now, maybe it's the Brexit thing, but I still think that they are intrinsically and tightly attached to one another. Not least because of the importance of financial markets, but the financial markets are the same markets. It's the same people, right?

• 47:29Speaker 03

  It's my Dartmoor students, my old Dartmoor students who worked for JP Morgan in Wall Street. And then for two years ago, JP Morgan in, in the Canary Wharf. So I think the two countries are interesting because of their importance of, of the financial markets. Um, the other sense that I get is that, the big difference I get is that in America, people think you can, you can do things, this is all positive. And we can get stuff done. The sense that I have in the UK is it's pretty hard to get stuff done. You know, you move into your house, you move in and within an hour of moving in, the TV's working, the phone's working. And everything's been checked out and you try it out in England. So I have a sense that.

• 48:07Scott Galloway?

  I, I am trying it in England, England professor. It's, it's a total, it's a different world.

• 48:13Speaker 03

  Yeah, I mean, that, the, the thing in America.

• 48:15Scott Galloway?

  London has its own, has its own set of charms. Service is not one of them.

• 48:18Speaker 03

  Yeah, exactly. The service economy, my, and I, my daughter went to St Andrews and was gonna stay in England and basically came and said, I just can't. They just don't do service well. It's just much easier to live here and to get things done. And I do think I've seen over the, what is it, thirty two years? Um, I did see quite a lot of change in positive attitudes and stuff during the, the years up to the Great Recession. And then after it, things sort of changed and, and altered. And I think the Brexit thing is really a, a big thing that split the, the country asunder and families asunder. And I, I mean, I, I have taken a very strong view as an economist. I say, I'm waiting for somebody to tell me a benefit of Brexit. And to this point, nobody's actually told me one.

• 49:03Scott Galloway?

  Danny Blanchflower is the Bruce V. Rana Professor of Economics at Dartmouth College and a research associate at the National Bureau of Economic Research. He's also the author of Not Working: Where Have All the Good Jobs Gone? Previously, Danny served as an external member of the Bank of England's Interest Rate Setting Monetary Policy Committee from June 2006 to June 2009. Professor, I love the fact that my colleague Jonathan Haidt says that the best way to get stupid is when everybody starts barking up the same tree. And I love that you're a bit of a contrarian and you say these things fearlessly. Really appreciate your good work and for coming on the pod.

• 49:38Speaker 03

  Yeah. Remember, the emperor didn't have any clothes on.

• 49:42Scott Galloway?

  There you go. Get out of the market. All right. Thanks very much, Professor. Enjoy Dartmouth.

• 49:47Speaker 03

  Thank you, my friend.

• 49:55Scott Galloway?

  Algebra of Happiness. I was struck by Professor Blanchflower's willingness to be a contrarian. And I love this notion of you get stupid when everyone's barking up the same tree. And in America, we've decided that raising interest rates aggressively is the right thing to do, and then we might be able to stick the landing and exactly thread the needle. And Professor Blanchflower, and he may be wrong, pointed out some really interesting things. One, that in a modern economy, inflation is self-correcting, and that it's much more damaging and harmful to an economy to put it into a severe recession. And I don't agree with that. I'm sort of more where Chairman Powell is around the importance

• 50:36Scott Galloway?

  of taming inflation. And I think increasing interest rates and having recession is probably healthy on a regular basis. But it's important that you have a diversity of opinions in your life, that you not find people and opinions and advisors and use them like a trunk uses a lamppost. And that is, you use them more for support than illumination. Make sure you have some people in your life that will take the opposite view of things. And it gets me angry. I have some people in my life that disagree with me all the time. I find that they're naturally contrarian. And want to argue. And because I have a lot of people around me who agree with me, I get a lot of external reaffirmation that say, you know, you're awesome or you're interesting.

• 51:19Scott Galloway?

  So when people disagree with me, my initial reaction is I get pissed off. But I'm now mature enough to realize that I need those people around me and they're really important. Diversify the voices you listen to. Diversify a viewpoint. The dissenter's view is very important around decisions. I'd be very careful making a decision where everyone is in 100% unison. Find the person that gives you the other side of the argument. Diversify those voices you surround yourself with.

• 51:48Scott Galloway?

  Our producers are Caroline Shager, Claire Miller, and Drew Burrows. Sammy Resnick is our associate producer. If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Profite Pod from the Vox Media Podcast Network. We will catch you next week.

• 52:02Speaker 05

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• 52:32Speaker 02

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