Ruchir Sharma on America’s Debt and the Future of Capitalism

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. 

Today my guest is Ruchir Sharma, who is the Chairman of Rockefeller International, a columnist with the Financial Times, and the author of the recent book, What Went Wrong with Capitalism. 

We talked about American debt levels, US monetary policy, regulation and cronyism, industrial policy, the Indian economy under Modi, and much more.

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts.

Hi, Ruchir, welcome to the show. It’s so great to finally speak with you.

RUCHIR SHARMA: Thanks, Shruti. Thanks so much for having me.

Capitalism in America

RAJAGOPALAN: You are really talking about how the world has gone—in your book, part one of the book—you really talk about how we’ve evolved from limited government to almost an omnipresent and ubiquitous government in a matter of a century.

Then in the second part, you talk about the effect of this kind of expansive government on innovation, productivity, economic growth and even some downstream culture effects. In a sense, it’s like an excellent summary of your book title, which is “Why and Where Capitalism Went Wrong.” However, my first reaction to the book was a little bit different. My first reaction was, “Oh, my God, we’ve really gone a long way from what we imagine capitalism and markets to be.”

Yet, look at how robust capitalism is, because despite all this excessive government spending and overregulation and debt, the world hasn’t quite gone to hell in the more capitalist economies. We all seem to be chugging along well. In fact, the U.S. is more than chugging along. It is still a front-runner. How do you think about this? Why do things not seem as bad as when I read your book?

SHARMA: Well, I don’t think the idea of my book was to depress you but I think that it’s a revisionist history of capitalism, the book. But if I say, first, that to say that the U.S. economy is doing well, I think is both relative and a sentiment which is not shared by most Americans. As I say in the book, capitalism in the other Western nations—U.K., Europe—is in much worse shape than in America. The key, I say, for capitalism here, is that the hallmark used to be rising productivity growth, which spread the benefits to many people.

Instead, what we have seen in capitalism in the Western world, including in the United States over the last three or four decades, is that productivity growth has been declining. That productivity growth in the Western world in places like Europe and stuff has virtually come to a standstill. In America, the trend has been closer to 1% rather than the 2% numbers we used to see a few decades ago.

One, that productivity growth has slowed down on a trend basis markedly in America, which I say is a key symbol of the lack of dynamism or the decline in dynamism rather. It’s not as the American economy is not dynamic, it’s still dynamic, but the dynamism has come down significantly. The decline in productivity growth for me is key. That’s the centerpiece because that’s really what the key is to economic growth over the long term, as you well know.

The second point is that, about the American economy doing well, I’d say that if that were the case, then most Americans should be feeling it. Instead, survey after survey tells us that most Americans think the economy is moving in the wrong direction. Most Americans think that they will not be better off than their parents, a far cry from what it used to be. There’s so much intergenerational angst where the young find that everything from property prices to affording a car, home has become just so much more expensive than it used to be.

I think that you have a situation where on the surface things still look okay, but if capitalism and the American economy was in such great shape, then we wouldn’t have survey after survey telling us that they want change, they want the economy to be moving in the right direction—a deep sense that the economy today is not moving in the right direction.

The book is really an examination of that—why do people feel this way? As you say, that at the surface, the American economy seems to be doing okay, but compared to whom? Compared to Europe. I say that Europe is hardly a good benchmark.

In fact, since we’re speaking about India here and our connection here, I’m reminded of that old line that these friends of mine who used to run this show called “The World This Week” if you recall when we grew up seeing it on NDTV. He used to say that the compliments he used to get were that this is the best show on Doordarshan, and it would make him balk because is that really a compliment because the quality of Doordarshan used to be so bad that to be known as the best show in on Doordarshan didn’t feel that great is what he would say, even though it was such a great show for many of us.

Similarly, I think we have a world today where there are very few bright spots and America looks good relative to its competition, its counterparts in Europe, but otherwise, on a standalone basis, the decline in productivity growth is also a central feature of the America’s economic profile over the last few decades. You have so many people today in America, a vast majority, who are unhappy with the state of the economy.

We may get this growth at the surface, but the growth is very concentrated in a handful of companies that dominate. It’s very unequal type of economic growth that we get. As I pointed on the book, a very old distinction that inequality is a hallmark of capitalism. Again, you will get inequality because it’s supposed to reward meritocracy, but the sense that most Americans have now is that there is an inequality in opportunity. I think that the inequality in opportunity is something which is troubling many people and many Americans.

The book is really an examination of what happened. It’s a revisionist history, which starts off with capitalism in America and how it was founded on limited government and how the first Industrial Revolution happened with very little government involvement. And then ever since, we’ve had the Great Depression, we’ve had a steady increase in the expansion of government. You can argue from a very low base and it was required because we needed to build a welfare state. We needed some sort of greater government involvement in the economy.

Now, we have gone to a level where the government, as you said in the opening remarks, is all over the place, that it’s role has become such where, even in the cycle, the stats are shocking. The maximum number of jobs that any sector is creating is the government. It’s become such a government-led economy. The fiscal stimulus played such a big role in propping up the American economy over the last two or three years.

It’s a suite of government habits, I think, which annoys the average American: the regulatory overkill; the culture of bailing out companies on the pretext that nothing is too big to fail, and the bottom that has got lower and lower over time; the micromanagement of the business cycle, the flooding of the system with liquidity, which often inflates asset prices including property prices. It’s these things which I think is really at the source of so much frustration amongst Americans.

Problems in Monetary Policy

RAJAGOPALAN: Yes, and actually you bring that out really nicely in the book, the two parts that you were talking about. One is this regulatory capture, which really only rewards incumbents, large firms, larger monopolies and keeps out opportunity, keeps out potential contestants who might lead to that kind of standard capitalist creative destruction as we view from the point of view of economic freedom.

The second part that you bring out really well is that monetary policy has largely been captured, again, in favor of the rich. It is about socializing losses. It is about driving up prices of asset classes, which tend to be concentrated in the hands of a few as opposed to democratized in the hands of many. Can you just walk us through these two parts of the argument briefly and then we can unpack those a little bit more?

SHARMA: Yes. I think that one of the big issues that I’ve had in monetary policy is that the fact that, as you point out, that risk has been socialized. I think that this was such an important thing because one of the points I make in the book is that we seem to refer to the last 30 to 40 years as some neoliberal era and that neoliberalism has become such a bad word now, it’s almost like a pejorative.

What most people think of neoliberal, I think, is the fact that it’s led to a much greater role of markets and globalization, which is true that, yes, you’ve had globalization, you’ve had financialization and you’ve had the liberalization of some key markets across the world from China, India. Those things were very much a part of the so-called neoliberalism that we have had over the last 30 to 40 years.

One thing which gets lost in this is that a smaller government was never really something which came to be a feature of neoliberalism, because, as I show in the book, across the Western world, particularly in places like the United States, the role of government has expanded quite significantly. In the1980s too, which a lot of people think of as the start of the neoliberal era with Reagan, given his very free market rhetoric.

As I pointed in the book, something very important happened in 1987, which is that it was the first time the stock market crashed, and the Fed explicitly intervened to prop up the stock market by cutting rates. Some suspected it even more than that in terms of involvement in the stock market, but it cut rates even though there was no visible economic damage. The fear was a stock market crash cannot be tolerated because it may lead to a great depression kind of event. [Alan] Greenspan became this big hero of the Wall Street crowd.

In fact, even the political crowd, after that, because you always thought that he was there to protect you, which is that he managed the cycle so well. That “Greenspan put” is the term which came to be very popular after what he did in October of 1987. Now, the problem with that is that, on the downside, fine, if you want to protect on the downside—let’s say we cannot allow the stock market to crash too much because it’ll lead to too much collateral damage. The asymmetry is really weird.

Okay, fine, on the upside, you will do nothing. Then the stock market goes up. You can make some noises about this being irrationally exuberant, but you will let it be. The philosophy which came to be is that if the markets are going up, we don’t know whether they’ll stop. We don’t know how to predict a bubble, so we’ll ignore it. On the downside, if something happens, we’ll be there to clean the mess.

That thinking, I think, has been something which has led to this socialization of risk concept that I expand a lot in the book. This is what I mean by it, that on the upside, the profits can be capitalized and you can make tons of money. Anyone who’s figured that equation out knows that. And on the downside, everyone knows that the risk is protected so people with capital operate in such a way.

The other thing, as I say, is that the reason why the Fed and the other central banks have been so accommodative in terms of their monetary policy for much of that period is because there was no consumer price inflation which [got] phased out after ’70s because, in terms of globalization, we had technological progress.

Consumer price inflation didn’t really come back until the pandemic. It was like a declining trend. Central banks were even more emboldened then, say, “Hey, have you got no consumer price inflation?” Then we should just do whatever it takes to support growth, to support in terms of markets to go up. Therefore you got the things like QE, quantitative easing, which came into play. First in 2008, you can argue that was fine in the global financial crisis. Then again after the crisis was over.

RAJAGOPALAN: It just went on forever.

SHARMA: It went on forever. Why? Because the central banks were emboldened that there’s no consumer price inflation, so we can do whatever it takes even if it leads to asset price inflation, and that’s my big problem, which is that asset price inflation is also a form of inflation. Why don’t we consider that? For most people, property prices going up with so much liquidity flowing into the property market is a real problem because it prices out so many people from the property market.

As I detail in the book that, a generation ago, it typically took a young family about three years to make the down payments for buying a new house. By 2020, before the pandemic, it was taking 17 years or so for the average family to make good on the down payment for a home because property prices have ballooned and a lot of this excess money printed by the Fed has made its way, I think, into asset markets.

I know that these are very simplistic things, but in the last 30 years, if you look at it, the growth of money supply has been far outstripping the growth in the underlying economy. Some people will argue that, yes, that’s fine, money supply is some dated tool. Yes, in terms of the fact that the traditional relationship between money supply growth and inflation, as we know it, consumer price inflation broke down.

As I argue that you still got a lot of money supply, which found its way into asset prices, whether it’s property or stocks and bonds. Most of these assets are owned by the rich and the older cohort. You get a lot of frustration among the young people, particularly when it comes to property, that they’re being forced to live with their parents much more compared to what their parents did at that time because buying a home has just become so expensive. I know a lot of these Wall Street firms and all buy homes, and in fact, even accumulate small apartments and multifamily homes just because they have the money and the wherewithal to do it. The bottom line is this is all driven up asset prices.

Stocks and bonds going up lead to some envy that the rich people who own stocks and bonds are doing much better so that’s inequality. The more troubling aspect is the fact that when property prices get out of control and property prices are rising relative to your affordability, that’s a real problem. My problem with monetary policy essentially is the fact that it’s been very focused on consumer price inflation and not enough on asset price inflation, which is also a pernicious type of inflation, particularly when it comes to property prices.

The second thing, as I said, is the fact that you got this socialization of risk where the so-called Greenspan put has been in place, that every time the markets wobble, you have a feeling the stock market and it will stabilize because the Fed’s reaction function will change. On the downside, that’s the issue, but on the upside, you can make as much money as you want.

RAJAGOPALAN: I think, related to this, is the overregulation point. Again, we can talk about it in the context of housing. It is much harder to build new housing because there is now so many more state-level, local-level, environmental protection, endangered birds, the layer upon layer of regulation. Recently, the New York Times did a lovely piece on how hard it is to install sensible elevators that are used in Europe and all over the world in buildings in the United States.

It goes hand in hand. On the one hand, you have, as you said, driving up socialization of risk, socialization of losses, and on the other side, you have this overregulation, which makes it very difficult to bring in new supply when it comes to housing. I have a couple of follow-up questions.

Now, these are very specific to the United States. While I broadly agree that younger people are very disillusioned with what’s happening broadly in the economy, they’re very upset about this big business-big government relationship. They’re quite upset about housing prices and so on. The trend, however, is that they are moving away from some of the more “socialist states” to the more capitalist states within the U.S., right?

SHARMA: Yes.

Elite Consensus and Capitalism

RAJAGOPALAN: You have this movement out of these coastal, elite blue states which have so much regulation, so much welfarism, and you have this movement into red states, which actually have lower regulation, especially when it comes to really basic things like occupational licensing, building housing, setting up a new solar plant and so on. When I look at that movement, it seems to me like Americans are actually embracing capitalism. They’re not saying something is wrong with it, they’re actually going where the opportunities are. It’s the elites who have gotten the whole picture upside down. How do you think about that?

SHARMA: No, I think you’re right that there is movement taking place to states, but yet, as I document in the book, that social mobility and economic mobility in America today is a record lows. Yes, there is some movement happening, but the mobility, both economic in terms of moving up the ladder and social mobility, they’re both today at very low levels. I think that both things are happening.

As I said, people are moving because they’re being forced to move, but that doesn’t mean that they’re happy about it always, in terms of the fact that given a choice which place you would rather be in. I think that the fact that the economic system has become so distorted where some states are attracting much more and other states are hemorrhaging, people are just reacting to the underlying conditions on the ground. As I said, as I document in the book, economic and social mobility is still at very low levels just now.

RAJAGOPALAN: You don’t think of it as voting with their feet in favor of lesser regulation, more innovation, more productivity, less government overreach? You don’t think of it that way?

SHARMA: No, I think that you’re correct. As I said that, most young people also when asked in surveys— 

RAJAGOPALAN: They’re disillusioned.

SHARMA: Apart from disillusioned, when they’re asked, “Would you prefer capitalism or socialism?” most people tend to answer socialism these days.

RAJAGOPALAN: Is that because the university professors are doing such a terrible job of explaining these concepts, because they seem to be choosing differently with their feet?

SHARMA: I know but I’m saying that it’s also because I think—and this is what I’ve tried to do in the book—I emphasize the point that what we have today is not the capitalism that we had envisioned, or at least the Founding Fathers. It’s moved very far away from that.

What we have today is a very distorted form of capitalism but yet most people label what we have today to be capitalism. When the young people aren’t getting what they want out of the current system, they’re obviously going to be disillusioned.

RAJAGOPALAN: The second part I wanted to unpack in your remarks, a lot of this overregulation, big government seems to be driven by an elite consensus. In one sense, you’re absolutely right, the old elite consensus that the way to go is limited government, economic freedom, that seems to have broken down a little bit.

One thing you don’t answer in the book is why the elite consensus may have gone in this particular way. Is it just where they are on this curve? What’s happening in the U.S. is that low levels of GDP per capita, like in any other developing country, you worry about opportunity, you worry about economic growth, you worry about productivity and upward social mobility, but at higher levels of income, people can have the luxury of being complacent.

Is the fault in the elite consensus the fact that it’s coming from the elite? If he had a greater diversity of people right at the top, if he had more working-class people represented in some of these institutions, do you think things would be different? Or do you think that ship has just sailed? The United States has fundamentally shifted into a different era of big government and it’s not so much about who’s making the decisions? This is just now some kind of new level or new consensus and everyone’s going to operate, somewhere they can tweak along the margins but this is where they’ll operate.

Crisis and Course Correction 

SHARMA: I say it in the book, which is that the road to hell is paved with good intentions. I think that, whether it’s the government or the so-called elite that you speak about, I don’t doubt their intentions often, which is that, okay, they’re trying to do what they think is best, but their default is to do more of what has already happened. As I said, the problem is that the reflexive action of most people is that, if you have a problem, you need the government to come and fix it.

Therefore, we’ve seen a progressive increase of the role of government, which is that the intentions are good but I think that it is the fact that if you think that you have no constraints, you can just keep on increasing the role of government. As I said that, as I end the book on this note by saying that even though the crisis is already happening, because it’s an insidious crisis with lower productivity growth, greater disillusionment amongst the young, a lot of intergenerational inequality and angst which exists in the country, but none of this is going to change on its own because the crisis is insidious. You need an apparent crisis, which is if there’s a fiscal crisis, the government literally runs out of money. That’s the time that I think you will begin to see some changes take place in the American mindset.

I’d say that, for now, I don’t see much of a shift happening, even though in the book I end up by trying to offer some new thinking. But I’d say that I don’t see that being implemented in any big way until and unless you have an outright crisis, a fiscal crisis. We’ve had an insidious crisis so far, which is a lack of dynamism, a decline in the creative, destructive fiber of the economy but we have not had the apparent crisis where you’re just forced.

Historically, whether it was Greece last decade or Sweden in the 1990s, all places where the government had become too big and was living beyond their means, it took a big apparent crisis for there to be a course correction and for a shift to take place.

RAJAGOPALAN: Do you know, this is where I was really alarmed when I was reading your book, because I would have thought that the pandemic is that apparent crisis. Things going into lockdown, everything just slowing down both within the United States and globally. That didn’t even register when it came to thinking about how we deal with big government or overregulation. What is this crisis you’re talking about? Is this like asteroid hit, nuclear war? What is the realm we are entering for course correction, if that’s what we need?

SHARMA: I think the course correction, if you look at the other countries, the Sweden, the Greece that I referred to, it’s like when you end up having a fiscal crisis, which is that the people understand that the government has been living beyond its means and it has a fiscal crisis. That’s when the course correction will begin. Once you have a fiscal crisis and people will say, “Okay, we have to touch entitlements. We have to do something about this runaway spending. We have to do.”

The case that I’m making in the book is a bit more subtle, which is the fact that we’ve had an insidious crisis currently marked by low productivity growth and fueled by the suite of government habits from regulation to the bailout culture. I think that the real crisis is a fiscal crisis where people will be like, okay. That’s what we’ve seen in places like Argentina or, before that, Greece—

RAJAGOPALAN: India in ’91.

SHARMA: —ya that’s classic. Governments only reform when they run out of other people’s money to spend. I’d say that, until then, they’ll keep finding new ways to raise revenue to try and fund the government.

The disconnect is here that you have the Trump folks who just want tax cuts and not tax spending, and think that the old thing that, “Oh, if you cut your taxes, you’ll end up getting higher economic growth and that will take care of all your deficits.” It didn’t happen during Trump’s term. We saw that he cut taxes and the deficit widened under him. Under Biden, it’s gone into overdrive. The spending under Biden is like just out of control. The deficits he’s running are in a totally different zip code.

RAJAGOPALAN: This is where the American experience in the last few years is a little bit puzzling. Have Americans not been forced to reckon with this problem because they are still doing better than the rest of the world? Money is still available. America is still the place to invest when American bonds are issued or T-bills. There are lots of people who are willing to buy them. There are still lots of people who are willing to invest in America. It is still the number one place for immigrants to move.

Is it still riding off of the spoils of that wave, and you think the reckoning has not yet come, or it’s just eventually going to come? Even with all of these factors, even if the U.S. is doing better than Europe, and Canada and Australia, at some point, this will come to bear. Maybe later than sooner but it will come to bear.

SHARMA: There’s a lot of hubris, I think, [on the part of] American policymakers that we have the world’s reserve currency. Where else will the money go? What’s your substitute? Communist China? Or to do with Europe, which seems to always disappoint, where’s the money going to go? I think that the fact that America has the reserve currency, which allows it to borrow more and at cheaper rates, as well as research has shown, has a little complacency that it doesn’t matter whatever happens. We can keep doing what we want. Where else will the money go? Look at our tech prowess. Look at what’s happening on the AI front. Where else will the money go? I think it’s that arrogance. The problem is that you can’t keep testing that limit, because once you test the limit, then you are getting into a crisis zone.

Credit and Bond Markets in the US

RAJAGOPALAN: I want to get into the question of U.S. debt. Why aren’t credit and bond markets reacting more to these levels? These are unknown levels. Nothing like this has been seen before, what’s happened in the last couple of decades, especially the last 10 years.

In early May, I was just looking at this. The U.S. Treasury received orders for about 2.5 times the number of 10-year notes that it auctioned. There still seems to be a pretty robust demand for this. How do you think about this kind of demand? Is it that the U.S. government is accumulating more and more debt, but on the other hand, American households, American corporates have actually deleveraged, they’ve reduced the amount of debt that they have on their books?

SHARMA: As a share of GDP, yes.

RAJAGOPALAN: As a share? Is that what’s going on? There’s an adjustment and the U.S. government can actually afford to have more debt and there are takers for it. Or is it because the world just has so much money floating around and not enough avenues to invest it in, given the slowdown in other developed economies, so it’s all coming rushing to the U.S.? Is it some third reason that I can’t quite wrap my head around?

I’m very much of the belief that markets self-correct and they sound alarm when something terrible is going to happen, but that just doesn’t seem to be happening. The market seems to be very comfortable with the current levels of U.S. debt.

SHARMA: Yes. That’s true. It’s partly because, as you said, that the alternatives are so weak that people still think that this is the safest place to invest. I think that what’s happening here is that we are about to test these limits now because, as I show in the book, the U.S. first for the first 200 years of its economic history, the U.S. never ran a budget deficit in peacetime. It ran a budget deficit where occasionally when there was a war or some big depression. That’s what it did right up until the 1970s. Very rare.

RAJAGOPALAN: Yes, but those days are long gone.

SHARMA: Exactly. Since 1970s now, we’ve run a budget surplus in only five of those last 50 years or so. Even you had the big tech boom in the late ’90s or so. I think that that’s the point, that the magnitude of what’s going on and in terms of the amount of debt which is being put out there by the U.S. now has just gone to a different zip code, which is the fact that we are testing it.

The big lesson that the U.S. policymakers thought they learned from the global financial crisis was that when the house was on fire just douse it with as much water it takes, that it doesn’t matter, and there’d be no negative consequences of too much. There’ll only be negative consequences of too little. I think that it’s, again, that thought process which has changed.

Now we are in a space where, because of this exact reasoning where we think that, hey, the U.S. took on all this debt, people have been crying wolf about a debt crisis since the 1980s when the clock went up in Times Square, where people would track in terms of what was happening to the debt. People have been talking about it since then, nothing has happened.

All these must be some really old fuddy-duddies talking about these, like the country’s debt and stuff like that, because there seems to be no consequence to it. I think that the U.S. is about to test what is the market’s tolerance for it. The problem is that you may look at today and say, “Hey, it’s okay. The market’s not doing anything too negative about it.” Then the problem with the American government is that it’ll keep testing it now.

If Trump comes to power, you get more tax cuts, extension of the tax cuts. If Kamala Harris comes to power, then you have much more spending continued, because under Biden the spending went ballistic. I think the government is now in the mood where it’s saying that, “All these guys have been telling us to get the budget deficit in order for years, nothing negative has happened, so let’s keep going.” That’s my fear, which is the fact that we are reaching the zone which could be pretty close where the government’s really going to test that. What is the absorption capacity of the market? Just because in the absence of it, the inclination is to either spend or cut taxes.

I think that that’s my problem today. And we know how quickly sentiment can turn once people recognize, “No, enough.” Then sentiment can turn, as a sort of scenario-like analysis, and then in the next recession, whenever it comes, the next downturn, the U.S. could be running a budget deficit in that downturn of 9% to 10% of GDP.

Is the market going to keep saying, “Oh, it doesn’t matter. Because of your tech innovativeness, you can run a deficit which is 20% of GDP”? Maybe. I’d say that it’s beginning to now get to those levels where the U.S. government almost seems emboldened to test it out. Let’s go ahead and do what it takes. 

In the olden days, there used to be balanced budgets during recoveries. Then we said anything up to 3% is okay to run a budget deficit, and the U.S. ran a budget deficit of about 3% of GDP for much of the last 20 years. Now we are at 6%, and even if 6% is not causing any apparent problem, so what? Let’s try 8%, let’s try 9%, let’s try 10%. I think the path is that way in terms of what’s going on.

Industrial Policy in the US

RAJAGOPALAN: We’ve talked about the loss in dynamism because of overregulation. We’ve talked about testing the limits when it comes to debts and deficits. Throughout this period, America kept tariffs relatively low. It wasn’t very protectionist, and the idea was very much let there be contestation from anywhere in the world.

Now, what alarms me is that, in the last two to three years, even that has changed a little bit, partially because of the pandemic, and of course, because of China. Now, there is a new wave of protectionism and the horror of horrors, which is industrial policy. I never thought I would see, in my lifetime, America seriously talk about that old-school industrial policy that all these Asian countries were doing in the 1950s and 1960s. The U.S. has already started doing it.

It’s picked semiconductors, it’s picked climate technology, it’s picked all the new battery-friendly minerals and mining, and those are the areas where it started with industrial policy. But we know something about industrial policy, which is if you started in one place, it goes to all the other sectors. How much better or worse is it going to be when you think about this other part of the puzzle, which is protectionism and industrial policy tagged on to overregulation debts and deficit?

SHARMA: Yes. I think that you’ve already answered the question in a way which I think is great, which is that do we today want to load the government with everything. When people tell me that, “Are you advocating some libertarian approach with no government?” I said, “No, absolutely not,” because I know there is no return to the laissez-faire capitalism of the 19th or the early 20th century. That’s done.

I’d say that the balance needs to come back, that the pendulum has swung too much the other way. In the first 200 years, the approach was that it’s not the government job to be bailing out the private sector or also interfering in the business cycle. There was a history to this, which is that, as I said, that a lot of people obviously remember the Great Depression from the history books of 1929.

What they say about that in 1929 is the fact that the thinking is that the stock market crashed first, and then you had the thinking then was that the job of the government is to do nothing. In fact, it was in 1920 when you had something called “The Forgotten Depression” as a document in the book—and this was a very important analogy—“The Forgotten Depression” was that it happened in 1920 and the approach then again was that the government should not intervene, let the business cycle play itself out. The government followed that approach, and voila, you had the big roaring 1920s. When the 1929 crash happened, initially, the policymakers said that we must follow the same approach, but a strength carried too far became a weakness. The slogan was liquidate, liquidate, liquidate.

I was thinking that because they saw the past cycles, where the cycles would self-correct, and here they thought that if we precipitate a liquidation in a way, we can set the base up again for a big roaring 1920s way because that was guided by the past experience.

We know that was a colossal policy mistake, a strength carried too far becomes a weakness, and you ended up getting the big crash and the Great Depression of the 1930s. Now what the problem has happened is that every time there is a financial wobble, we all think that, “Hey, this is a 1929 waiting to happen all over again, so we need to preemptively do something about it.” Therefore, the whole problem, like in the book as I document, about the Silicon Valley Bank, which is the fact that a bunch of rich depositors from Silicon Valley, and again, were offered some sort of a bailout—the depositors were at least. I remember saying that should the government really be getting involved here with just a midsized bank of Silicon Valley? The response to people was that, if the government doesn’t do anything, the whole system will come collapsing down. Is that what you’re advocating? Are you advocating another Great Depression, liquidationist? 

My point is that this is what’s happened now, which is that we have gone from one extreme in 1929 where it’s like, don’t touch, in fact, precipitate the end of a business cycle so that the excesses are purged, to now another extreme where, at the slightest hint of any trouble, the government has to step in and intervene because if the government doesn’t do that, you could have 1929 all over again.

My argument in the book is that, can we at least restore the balance somewhere in the middle in terms of what happens? If we don’t restore the balance to the middle, and you say, “We can’t, as a society, tolerate any pain,” then my thinking is that, “Okay, then be prepared for all the adverse consequences of those interventions.”

Those adverse consequences of all those interventions include lack of productivity growth. It includes rising inequality. It includes the incumbents getting entrenched because every time the government intervenes, it’s helping the incumbents. It keeps alive so many zombie companies. Like the chapters in the book, as you know, is about the zombification of capitalism. Just look at the number of zombie companies which have proliferated across America now, whereas we would mock these as—like the term zombie companies in the 1990s as some Japanese phenomenon.

Misunderstanding Systemic Risk

RAJAGOPALAN: Honestly, that chapter in your book was eye-opening for me because even I didn’t know the extent of that in the United States. For me, zombie companies are all these PSUs in India, which are kept alive, all these evergreening of loans. I thought these are very classic developing country problems or China a few decades ago. That was really eye-opening for me. I knew some of it is there in the U.S., but just to what extent.

Just to be fair to the people who are intervening in these situations, you just mentioned that they’re not even willing to take on a little bit of pain. At the slightest problem, the expectation is that the government’s going to come sweeping in and hold everyone’s hand through it. Do you think it is that the world is more connected than ever before, and somehow the policymakers seem to think that every risk is systemic risk, as opposed to there are going to be some cases where something goes wrong, it’s going to be a standalone event and it won’t ricochet through the banking system like Silicon Valley Bank?

Whereas there are going to be other cases like maybe the collapse of Lehman Brothers, which is going to have an impact on other banks. Do you think it’s that misunderstanding of what is a system-wide risk, or what is going to have that domino effect, or is it just we’ve turned completely paternalist, and now big government will come and save us in every instance? When I read the book, I got the sense that that was the case you’re making, that it’s a new age of paternalism intervening at every problem. Sometimes, I also feel like maybe the U.S. policymakers’ responsibility is completely different because whatever the U.S. does will have ripple effects across the world.

SHARMA: Yes. A lot of these things are a very recent phenomenon. It’s not as if this was always the case—the whole bailout culture. One of my favorite chapters in the book is on the bailouts, which is that until 1984, when you had the first significant financial sector bailout of Continental Illinois, the bank, there was no culture of bailing out American companies until then.

The issue is that once you start doing that, and you say, “Oh, we have to do it because the world is more interconnected ” you make the system more fragile then also because then the system expects it. So the system expects it and it just keep growing in terms of it because it knows that there is a protective layer. Then you keep growing, and if you keep growing, then you make it even more fragile. It’s a bit of a feedback loop, I can call it a vicious loop even, which is that you keep making the system much more fragile with your interventions and your actions.

RAJAGOPALAN: No, that point is well taken that past the point, the bad decisions and the higher levels of risk-taking are going to be endogenous to the system of bailout culture.

SHARMA: Yes. I think the system becomes more fragile. That’s the problem. How do you make the system more anti-fragile in terms of that? The analogy that I use in the book is one of pain management in America, which is that the slightest hint of any trouble, you administer the patient with more and more drugs and opiates. The patient then becomes hooked to it, and so therefore there’s an opioid crisis in a way. Now, the medical profession is realizing the folly of that because you’re hooked to opiates. I think the American economy has similarly become hooked to opiates in a way.

RAJAGOPALAN: Here, industrial policy that the U.S. is trying to put together is a little bit different from the bailout culture. Here, it’s very much driven by governments in Asia, most particularly China. They subsidize their companies in such an enormous way that there’s no way any normal free market firm can compete with them. Oftentimes, when it comes to something like electric cars or mining, or even semiconductors, it’s going to take such a big fixed-cost or a large startup cost that without some help from the government, these things will never quite take off from the ground.

Part two of that argument is, of course, China is scary. If you let Chinese firms do this, then it’ll end the world. We leave the second part out. How do you perceive the industrial policy, which, to me, is markedly different from the bailout culture? How do you think that’s going to play out? Is it going to actually manage to contain China, which is the second part of that goal?

Are these firms going to do well, or are they going to turn into Indian public sector enterprises, which are just around forever and ever, and live off government support for the next 80, 90 years, or will they ever find their feet? This is the nature of these businesses, which is green tech or semiconductors or climate tech.

SHARMA: Right. Now, I find it a bit ironical that we are trying to emulate China just when the Chinese economic model seems increasingly discredited, given the amount of debt that they have taken, given the other issues they’re facing in their economy today. That’s a bit ironical. Now, industrial policy, as I said, one thing is that which countries are more suited to do industrial policy?

Remember, for every Chinese example, there are five countries in the world where industrial policy has been a failure. Latin America and other places are all cases in point. India—also we know how it ended up. For me, it’s a bit like, what’s your culture? Is industrial policy better done by governments, which are very efficient authoritarian regimes, where technocrats can make some decisions and force it down?

Is industrial policy compatible with a democratic, chaotic system? I think that it’s that old thinking—research that I’ve done in one of my earlier books, which is a question people ask that, is an authoritarian regime better or a democratic regime better? Because, after all, the biggest success stories in the world have been authoritarian regimes in terms of economic growth.

RAJAGOPALAN: So have the biggest failures.

SHARMA: Absolutely. That’s the point I made in that, that for every one success, there are five failures in Africa under authoritarian regimes. I think industrial policy has a similar track record, that it’s worked here and there, but we forget all the places where it’s badly failed. Again, it’s the hubris of the government to think that they and America can do it best. Whereas America has been founded, and this goes back to the basis of the book, that they founded it on a principle of limited government. That was America’s hallmark.

In fact, America always lagged Europe in terms of setting up a new welfare state, setting up a government and stuff. China, on the other hand, started out with maximalist government, which then retreated over the last 30 to 40 years, and it’s an authoritarian regime at the end of the day. The issue is that, for us to just do something because some other country did it, and you quote that one example where it’s succeeded in East Asia somewhere, and then to say, “We can do it,” but is it compatible with our system? Then, what all is this government going to do?

Which then in China’s case, as you know, when the government also followed a very ruthless form of capitalism as well—China never had a welfare state for many, many years. The government could say, “Okay. You should all move to the coastal cities,” which would lead to huge migration, lead to all sorts of chaos for societies, but the government said something needs to be done and got done.

The problem in America is now that we want to copy all the ideas from the rest of the world of what the government’s doing, but there’s no discussion about copying some of the ideas of minimalist government as well. As I argued, it is a whole chapter in the book about Taiwan. It’s such a successful East Asian country. The reason I quote Taiwan is because I say that in the pandemic everyone spoke about Taiwan as this country which handled the pandemic very well, about its state being so efficient, tech-savvy. I said, “Okay. Fine.”

In Taiwan, government spending as a share of GDP is 20%, so you can get a lot by not throwing that much money at the problem. Are we going to emulate that? Are you going to emulate any example in the world which involves more government? If you end up overloading the government, you’ll end up getting more inefficient outcomes.

If you want the government to do industrial policy, you want the government to spend more on defense, you want the government to also support green tech climate change policies, you want the government to regulate anything which appears to be a bit risky, what is the government going to do? You’re going to end up with a lot of inefficient outcomes if you’re going to overload the government with so much responsibility, and that’s already happening.

As I go back to the fundamental point, that if things were working really well, you would’ve very high productivity growth, and most Americans would be very happy with the way things are turning out, and instead, they’re not. The first step to a cure is to diagnose the problem. If the problem is too much government in the first place, and you’re going to keep adding on more layers of government or more government action, then just be prepared to have more of the same problem. That seems to me the logical conclusion.

Declining Birth Rates and Economic Growth

RAJAGOPALAN: The other thing you talk a little bit about in the book, not in as much detail as some of these other themes, is the decline in birth rates. One part of these increasing deficit and debt levels is that someone has to pay for it in the future, and a very large part of economic growth and productivity comes from literally their headcount of people. If the headcount of people starts declining, then we’re in trouble. We’ve seen a little bit of that with Japan with their aging population, and now the fear is that’s going to come to Europe and the United States.

Do you think the U.S. will have another baby boomer moment or decade? Do you think we’ll solve this by immigration, or do you think we’ll just perish like Japan? I’d have the same question for South Korea, actually, if you have any thoughts on that.

SHARMA: No, I know but it’s very hard to reverse demographic trends. Something I spoke extensively about in my first book, “Rise and Fall of Nations”—my previous book, rather, first book was “Breakout Nations,” that it’s very hard to reverse demographic trends. I just feel that I don’t see a big reverse in this trend. Perish may be too strong a word, but I think that the population growth around the world has peaked and it’s declining.

The 1980s, there used to be just two countries in the world where the working-age population was declining, Afghanistan, Somalia. Today there are more than 50 countries in the world where working-age population growth is declining. Again, America looks relatively better compared to Europe on this metric too.

RAJAGOPALAN: Because of immigration.

SHARMA: Yes, I think immigration plays a big role in that, but in general, even the birth rates are much better than in many European countries. Immigration’s been a core strength of America. The issue is that, once again, immigration has become, as you know, a very hot topic. To expect immigration to support this is not even that feasible anymore because there’s obviously issues with the social fabric of a country when you have too much immigration at some point in time.

I think that’s the whole thing that, in general, we have gotten used to, now we have to get used to a world where economic growth is going to be lower, both by demographics and due to productivity growth. I know there are things like AI and stuff which excite many people, and it’s possible that AI leads to a productivity boom, but remember that even with the internet boom, in the late 1990s and early 2000s, it led to a big spurt but it very quickly faded. I think that there’s the accelerated effect coming from technology, but there’s a depressant effect coming from the role of government there, so they’re going against each other.

Technology versus Regulation 

RAJAGOPALAN: I have a couple of questions on regulation. I completely agree with you that America has got this mountain of regulation, every year more and more is tagged onto it.

SHARMA: Yes.

RAJAGOPALAN: There are two ways to think about this impact of regulation. One is to reform it. This would be the old-school way of deregulation, repealing a lot of these laws and price controls and things like that. The other way is making it irrelevant, which we’ve increasingly done through technology. An example would be New York City. You live in New York City. This would be something the New York City taxi cab cartel and the medallion.

The government didn’t deregulate it in any meaningful way. That cartel was impossible to break, but instead that cartel became irrelevant because you got Uber, and you got Uber because of about a 20-year technological shift through smartphones and GPS location, and payments that were digital and so on. It seems that crazy impact of the New York taxi cab cartel, which is technically still on the books, we don’t feel it in our everyday lives.

Do you think this is what’s going on in the U.S. that a lot of the productivity shocks that are coming from the tech sector actually take that edge away from this crazy overregulation? We don’t feel it quite as much because we can do telemedicine, because we can book an Uber and so on so forth. Housing costs are terrible you got to live really far away, but you can telecommute into work and so on.

SHARMA: No, undoubtedly, that technology and all these things are playing a positive role, but my point is that, how do you say that having 3,000 new regulations a year—and under the Biden administration, the number of regulations has exploded even more, and the cost of that has exploded. This has all happened a lot more in the last 20 years or so. The total number of regulations which have been withdrawn over this time period have been 20 in total. You introduce 3,000 new regulations a year, over 20 years on average, and you withdraw 20 in total, so where is deregulation?

You’re right that some of it is happening by stealth because of technology and other things. By doing so much of this regulation, you are stifling lots of small and midsized businesses. One of my, again, favorite chapters in the book is about the oligopolies. As I argue in the book, that so much research has been done as to what’s behind these oligopolies, particularly in the tech sector. The very lazy answer is it’s all got to do with the network effect and the globalization and the spread. They show in the book that if that was the case, then why are sectors such as the beer industry or coffin makers, why are they also consolidating amongst a few players? I say that the government effect is much more powerful than the network effect in terms of explaining why we have so many oligopolies here.

I’d say that there’s are a lot of perverse consequences of this regulatory environment because regulation by definition tends to be pro-incumbent. It tends to be pro-big business because the big businesses have the wherewithal to deal with all the lawyers and the money required to set up a new business. As I said in the last 20 years or so, I know it for a fact, having experienced it firsthand, the cost of setting up a new investment fund, just an example, has gone up 10 times. The average American spends 16% of their working time dealing with legal compliance courses, other attestations, which is just deadweight loss on the economy.

All this is the cost of regulation that I’m trying to bring out here, whereas what you’re talking about is new industries and going on their own and stuff like that. But just look at the cost you’re putting on the average employee in terms of that. Just look at the way you’re stifling small and midsized businesses by this massive regulatory burden and the cost that you’re putting. There’s been no true deregulation on a net basis, that would mean that the number of regulations coming down and you’re having that. We haven’t seen that era.

RAJAGOPALAN: No, I don’t disagree with you on that. I just always keep wondering why people don’t protest. I think one of the reasons people don’t protest is there are these other avenues which have softened the blow of this kind of regulation. I actually think one of the worst costs of the overregulation that you’re talking about in the book is how it gets exported to developing countries. We have this idea of best practices that get exported. India recently proposed a new framework to regulate digital marketplaces, which are all these big tech companies and network goods, and it’s literally copy-paste of the EU law, which was bad to begin with.

The trouble with exporting this kind of terrible regulation to places like India is, they don’t have the state capacity to actually bear the burden of such terrible regulation. In the United States, it might just be deadweight costs or an additional cost on people who may or may not be able to bear it. In India, it can completely collapse different state machineries. It can collapse the burden on a regulator or on courts. In Africa, it would be worse. I actually think the true cost of the regulation that America and Europe are putting on their books, we don’t even realize unless we take into account how they transmit globally.

SHARMA: Yes, absolutely correct, in terms of that. That brings me back to the reason for writing this book which is that here is America, it’s seen as the beacon of capitalism. If this country has moved so much away from what the founders had in mind about capitalism, then the signaling effect for the rest of the world is worse in terms of that. The brand of capitalism has been damaged. That is really the core argument and a reason why I wrote the book to show what America today has as capitalism is very different.

All because America is doing much better than Europe or U.K. or something like that, that should not be a reason for us to think nothing is wrong out here. As I said, look under the hood, look at what’s going on. Look at the amount of debt now required to generate a dollar of economic growth in this country in terms of that.

RAJAGOPALAN: It’s $5, right?

SHARMA: Yes. That’s the overall, but just the public debt as well. Because in the last 15 years, arguably, the private sector hasn’t taken on that much debt in the share of GDP, but the public sector debt has gone insane. As I argue in the book, it’s not like it doesn’t matter, but the government is supposed to be the borrower of last resort. Now it’s become the driver of economic growth by taking debt. If you do end up having a problem with the government, runs out of its capacity to borrow, there is no backstop then.

India’s Economic Future

RAJAGOPALAN: Yes. No, I think that point is very, very well made and well taken. I want to shift to India and I have a couple of questions. You and I are part of the second postcolonial generation that saw the consensus shift from socialism and move away from that and strictly toward markets. Even today, when I look back at that time, I feel like that’s an extraordinary change that we witnessed in India. Nobody today advocates going back to the socialist way of doing things.

No one’s really advocating for price controls and things. I know there are lots of murmurs about redistribution and regulation of every kind that keep popping up depending on what the current crisis is. Do you think that’s just a blip for the last couple of decades and India will eventually move in the same direction over regulation, more and more welfarism, moving toward more and more socialism or do you think that consensus has fundamentally changed in India and now we need a renewed effort, but things will never really slide back to the old times?

SHARMA: I think that the memory is still too fresh, among too many people for us to slide back to the old times. Nobody wants to go back to the days of License Raj and shortages and stuff like that. Yes, sure. I wish, in terms of the fact that we’d still talk in India about how to reduce the role of government rather than to expand it. I’d say that because the memory is so fresh, I don’t see us going back full hog the same way.

I’d say that the key thing for us—and I’m going to India next to talk about the book there—is that what lessons can we learn from here in terms of that, which are both good and bad that what America did so well and which led for it to become such a prosperous nation and what’s happened now to the brand of capitalism and the dysfunctionality. I think that we are at that stage where we can learn from the outside world in terms of and pick what’s good and what’s bad.

Sure, we will see some expansion in the welfare state. As long as the balance is there between welfare and in terms of building the infrastructure and spending on that, I think that’s fine. I think that this is more a reflection about what’s going on here in the U.S. which is what the lessons I’m going to take back for India.

Modi Government’s Economic Policies

RAJAGOPALAN: One way I view the Modi government over the last 10 years is there’s a lot of fiscal prudence, there is an effort to be more and more transparent about what kinds of deficits we have and put them on the books and also a genuine effort to keep those deficits in check which I really appreciate. On the other hand, my big problem is what they actually spend on. We’re still spending on propping up some of the most unproductive sectors of the economy, massive fertilizer subsidies, and free water, free electricity, all those old socialist things are still very much intact in India.They’re actually about 2% of GDP that the government subsidies to keep agriculture propped up. 

My issue is more with what they are spending on, that they’re not spending on health and education and infrastructure, and they’re really spending on all these useless things, as opposed to how much they are spending. Do you view it similarly, or do you take what’s happening with the Modi government and their government spending very differently?

SHARMA: No, I’d say that in terms of what they have done, I think that you’ve summarized it well, which is that the macroeconomic management has been relatively prudent. I was openly complimentary about the fact that they did not do this massive stimulus in 2021, a lot of optics about how they’re spending, but they didn’t do that which kept the macroeconomic situation much more stable, I think, especially for an emerging market. A recognition that you couldn’t do that out there.

I’d say that in terms of, in India, as far as I’m concerned, it’s like everyone’s competing on welfarism. How much more could they do and how much more they can do? I just don’t know. In a society like India, where socialism is still there, as I said, that the memory it’s still fresh, but not going back to the License Raj days. The proclivity to keep spending on poor or on welfare—

RAJAGOPALAN: Redistributing, yes.

SHARMA: —that’s still there. That’s not gone. As a society, it’s very different. Here societal things matter. America has been founded on a principle of limited government. In India, that’s not quite the case. It’s still always been one which has relied on the government much more there.

RAJAGOPALAN: Mai-baap [paternalist] government, for lack of a better term.

SHARMA: Yes. I’d say in terms of what’s improved in India, I do feel in all my election travels, which I do a lot in India, and see the countries, that the delivery mechanism has improved. The leakages are still there probably, but they’ve come down a lot. I think that they’ve been able to get much greater bang for the buck by that. If you look at the overall spending, as you said, they’re still spending a lot on possibly inefficient stuff.

As a share of GDP, it’s been under control. They’re getting much more bang for the buck in terms of that. Even the state’s governments are benefiting from that. They’re getting much more bang for the buck by being able to distribute much better because the digitization has really improved the delivery mechanism in India.

RAJAGOPALAN: Yes. Overall, what is your advice for Modi 3.0 when it comes to economic policy?

SHARMA: I think that, as I said, that I’ve long given up the advice of giving advice, just because I think it falls on deaf ears. No one really listens to any of it. My only stuff which has always been is that—I’d said so for the second term too—I think that the investigative agencies in India had gone into overdrive. They’d been let loose. I think that they’d been weaponized. I think that has economic consequences too, because you might be doing it for political purposes.

Once you empower them, how they misuse the power at the ground level is something which is very intimidating for many businesses and small businesses and other agencies out there. It’s also something which I think also scares foreigners and stuff like that, that you never know when this regulatory gauntlet is going to come and fall on your head. I think that if you really want to keep fostering more private investor confidence in the economy, foreign or domestic, how do you keep these agencies under check, under some rule of law rather than just take the high horse and say it’s all there to eliminate corruption. Anyone complaining against them is siding with the corrupt. I just feel that that’s misguided.

The advice I always say is that the problem—and this is a template, although the Modi government has somewhat defied it so far—is that the longer a government stays in power, the more complacent it becomes, the more arrogant it becomes and the more inward-looking it becomes. Because you’re surrounded by the same sycophants telling you all the nice things which you’re doing and happening. You shut yourself out to any critical eye or any outside advice.

I hope that they are going to see it in that context, that to have an open mind, to have known what was happening. We saw it just now that they paid a price for it because echo chamber and echo bubble made them believe that they were going to come back with a bigger majority, a more thumping majority and stuff like that. I don’t think that they were prepared for what happened eventually. It came as a shock to them. Just because I think that they were not hearing the voices from the ground. If anybody wanted to say that, they’d be shut down or you’d have the troll army go against them. I personally saw that in terms of when I was there covering the elections.

RAJAGOPALAN: Actually, I want to go back to that column that you wrote when you were covering the run-up to the elections. You wrote that there seems to be no Modi wave on the ground. On the other hand, no one’s saying terrible things about the prime minister either. There isn’t a wave in the opposite direction to dethrone Modi either. I remember that you also got trolled a lot for that particular column because the FT generally gets trolled for its coverage on India.

This in particular was, there’s no evidence that Modi is not going to get dethroned, and still FT people don’t want to believe that there’s a Modi wave and so on. One, what was it that you picked up on that made you get it right in a world where most people called it wrong? How do you really interpret that message other than that they believe their own hype?

SHARMA: My favorite thing that I’ve done in India for the last 25 years is that I formed a group of about 20 of us now, and every year we go cover elections in India that we all get together. Most of them reside in India, but we all get together.

RAJAGOPALAN: These are all journalists or investors? 

SHARMA: Exactly. All journalists. This is my other side. As you know I wear two hats. I’m an investor. I’m also a writer/author. This is very much that side, the investor, writer, author all come together in some way. This is really all my writer friends. In fact, that’s a criteria that everyone has to be a bonafide media person to come on these trips. I formed that group and for the last 25 years, I’ve averaged one trip a year. In fact, I’ve done just over 30 trips now.

Sometimes you do two years because India has a series of state elections. It is an excuse to travel in India for a week a year and to go to the interiors to try and understand what’s happening. Now converting that understanding into what exactly happens in the elections can be fraught because in elections you have all these combinations that if it’s a two-party contest, then it can work out very differently. If you have one party and two parties are split the other way, it can be very different.

Having said that, generally as a group, having done this for over 30 times, we go for a week, we meet all sorts of people apart from attending election rallies and meeting leaders. We speak to a lot of local people on the ground, whether it’s in villages or just at the end of the day, at whatever hotel we are staying in, we will go and invite people from the local business community, local journalists and all to come and meet us, local thinkers to come and meet with us.

It’s an aggregation of 20 relatively smart people meeting a whole bunch of people along the way over the week, and then to try to come up with some informed output of what was happening. This time, I had made an interesting route, which was we decided that we’re going to travel coast to coast. Close to the East Coast is Vijayawada in Andhra Pradesh. We started from there and over eight days we traveled and ended up in Mumbai, covering four states along the way, mainly Andhra Pradesh and Maharashtra but brief stops in Karnataka, and also in Telangana. We covered that.

A sentiment I heard on the ground, particularly in key battleground states such as Maharashtra, was that—in India that’s the problem, which is that no matter what a government does, there’s always anger in terms of that. Anger at some onion prices rising somewhere or something like that. One theme we picked up as we were traveling was that people wanted some opposition, that they were getting a bit tired of this totalitarian narrative that it’s all about Modi and in terms of he is all conquering.

People getting a bit tired that, yes, fine, we understand you, and we have no big complaints, but we want an opposition. We want a check and balance. I think the democratic fiber of India is something which I’ve had great faith in. The book I wrote in 2019, also, I wrote the same thing, that even if Modi wins, don’t underestimate the democratic fiber of India that runs deep. This is not a Russia or even a Turkey or something like that, where democracy does not run as deep. It runs in the veins of Indians. They want some sort of opposition.

I think that’s the sentiment I picked up as I was traveling, which is that apart from local grievances, people also want some opposition. In the expressions, I would hear that yeh bohot ek tarafa ho gaya hai, meaning that it’s become too one-sided.

RAJAGOPALAN: It’s too one-sided.

SHARMA: We need something. I think that picking up that sentiment through our travels is something which informed us, I think, and emboldened me to write this piece, which obviously got a lot of pushback and not just by the readers and the FT, it was also published a version of it in the Times of India. 

Then I was on TV speaking about that. I remember that the day the exit polls came out, some of the TV anchors decided to take shots in a somewhat indirect way, but pretty clear it was directed by saying that all these guys who come and travel and all, they don’t understand the Modi phenomenon and all that sort of stuff. The whole issue is, I said that for me, these are just wonderful journeys of India, exploring India. That was the result. We all try and forecast elections in the U.S. also, people keep asking me who’s going to win, I have no idea. 

RAJAGOPALAN: I don’t know who the other 19 who traveled with you, but I don’t remember 19 other people saying what you said. You must have picked up on something, or you must have been willing to say something that the other 19 were not willing to say.

SHARMA: In all fairness, I think that what we do at the end of every trip is we sit down and everyone gives their individual forecasts in terms of how many seats you think that they’re going to get. It’s just a fun game.

RAJAGOPALAN: We’re all doing this, right?

SHARMA: Exactly.

RAJAGOPALAN: This is our national pastime.

SHARMA: It’s the national pastime. We did that and I have to say that we don’t disclose this much, but I can speak about it now with a distance of time that the group consensus number was close to 260. Some of us were lower than that, but the group consensus was 260. You always have outliers.

RAJAGOPALAN: Why didn’t they publish it?

SHARMA: Because of the reason that it leads to so much backlash. So many people don’t want to be in this thing. Again, we’re not doing an exit poll. We’re doing a straw poll amongst people who are traveling and trying to figure it out. We haven’t traveled to every state. We’re doing a straw poll, but I wanted to say that we did have a sense. Now in the 30-plus election trips, there are times when we’ve got it wrong also. I remember we traveled to UP in the last election. We thought that the Samajwadi party would do much better.

We figured out later it didn’t. It was partly because we got the sampling wrong that we went to a part of eastern UP, which is such a large state where the Samajwadi party was doing very well but the rest of the state wasn’t. There’s no science behind it. The problem is that in this country, as you well know, making a wrong forecast is remembered much more than making a right forecast. I’d say that a lot of people aren’t comfortable with that. I also didn’t put a specific number, but I pretty much wrote openly.

RAJAGOPALAN: Fair.

SHARMA: Many people read between the lines and message me, “Oh, you’re saying that they’ll fall short of the majority.” It ended that way, the column, by saying that they’re likely to fall short of a majority and get ready for a Modi with a diminished majority and also get ready for fading talk of India’s democratic decline. It’s one of those times where you felt happy that at least your analysis was right, where so often you get it wrong.

RAJAGOPALAN: No, you called another set of elections absolutely right. You wrote another column this year on how 2024 is really the year of democratic elections. All the major countries, there’s a spate of elections. You wrote that most countries will face anti-incumbency except India and Indonesia. Indonesia, the incumbent is term-limited, but it was with the incumbent support that the president won.

In India, of course, Modi did come back for a third term though, with the diminished majority. In a lot of the other elections we’ve seen so far, the incumbent has been dethroned. You specifically had a line about Biden there. Biden’s been dethroned even before going into the election. Again, what is happening around the world for this kind of anti-incumbency? Is this much more related to the core theme of your book?

SHARMA: Absolutely.

RAJAGOPALAN: That’s what I wanted to pick at a little bit, that even though in the book you talk about how there’s all this disenchantment with capitalism and so on, there are some demands from the younger people for socialism, but there’s no explicit pushback. Is this the way that pushback is going to come, this kind of anti-incumbency pushing for some kind of new economic thinking, misguided as it may be?

SHARMA: Yes. I think that’s the thing which is that people are just keen to get change. They’re not happy with the status quo. This is what I think, you talked about the elite consensus and all, I think this is what they’re missing, which is that people want change. I think it’s the best thing that’s happened to the democratic ticket, which that in the U.S. too, that they have asked for—that is offering some fresh face. 

RAJAGOPALAN: Some alternatives.

SHARMA: It’s not a fully fresh face, but they’re doing that. I think that people are not happy with the status quo. That goes back to the core argument of my book, which is that capitalism is not working for the average person, and at least capitalism in its current form. Therefore, this anti-incumbency, a term which was really coined in India, which is that it’s a term that was coined in India because in India, anti-incumbency was such a powerful electoral phenomenon for post-1977 when India became a true multiparty democracy. That term has now gone global. In fact, if I were to nominate the phrase of the year so far, it would be anti-incumbency.

Alternative Ways out of Fiscal Crisis?

RAJAGOPALAN: I think I’ll second that. One last question. I know you’ve talked about how some reckoning will have to come if there’s a fiscal crisis or if the fisc becomes too difficult to manage past a point. Is there another alternative? Is it going to be democratic elections? Is it going to be culture? Is it going to be education? Is it going to be tech productivity shocks? Is there some other way out of this mess?

SHARMA: Unfortunately, I think that there is not, because I think that I don’t see it because as long as this keeps on going, people will keep on doing more of the same. There’s no talk in the U.S. amongst either candidate that what are they going to do to restrict the budget deficit next year. There’s no talk. Unfortunately, from an economic standpoint, there can be some marginal changes here, there and the other. I don’t see a big pivot until there’s an apparent crisis because the crisis I’ve described in the book is much more insidious. Productivity growth declining and joining the dots. Why are people unhappy despite okay headline growth in the U.S. and stuff because of the underlying problems here.

There’ll be no big pivot, there’s no incentive to, and that’s the historic example across history of nations, that nations only tend to reform when they have their back to the wall. India is a very strong case in point about that. Even other developed countries from Sweden to Greece or whatever, they finally started to cut back on the role of government and reform only when they literally ran out to money. You have to run out of other people’s money before you can change your habits.

RAJAGOPALAN: I’m not sure if that’s a depressing note or an optimistic note but thank you so much for doing this. It’s such a pleasure to speak with you.

SHARMA: I enjoyed the conversation. Thanks, Shruti.