Gravity Exists

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Pursuing Better Outcomes From Public Policy

June 12, 2022

Vikram Mansharamani is running for U.S. Senate as a Republican to represent New Hampshire.

Vikram is the author of Think For Yourself: Restoring Common Sense in an Age of Experts and Artificial Intelligence and Boombustology: Spotting Financial Bubbles Before They Burst.

He is currently a lecturer at Harvard University, where he teaches students how to make tough decisions by using multiple perspectives and systems thinking to guide their processes. Vikram has a Ph.D. and two Masters degrees from MIT and a Bachelor's degree from Yale University, where he was elected to Phi Beta Kappa.

Listen to our conversation:

Read our conversation:

Gravity Exists: Everyone. Thanks for joining us today. We're fortunate to have the opportunity to speak with Vikram Mansharamani, who is currently running in the Republican primary for US Senate in New Hampshire. Vikram is a lecturer at Harvard, and he's the author of the books Think for Yourself: Restoring Common Sense in an Age of Experts and Artificial Intelligence, and also Boombustology: Spotting Financial Bubbles Before They Burst. He holds a doctorate and multiple master's degrees conferred by MIT and has held positions in the investment industry prior to entering academia. Thank you so much for joining us today, Vikram.

Vikram Mansharamani: Oh, thanks, Andrew. Thanks for having me.

GE Yeah. So, before we get started with policy questions, I want to start off with… At this stage in your career, what on Earth made you decide to run for public office?

VM <laugh> Well, thanks for even asking it in that way. And in fact, it's a good way to phrase it. What on Earth? Well, let me tell you. There's a lot wrong on Earth today. A lot is wrong in Washington, DC, and a lot of issues are facing this country, and frankly, the future for my children. And I think it's really that sort of disturbing outlook that I see that inspired me to say, “Hey, I have something to offer. I believe my skill sets are unique. I am not a politician. I'm a business guy.” And I think that may actually be a good thing in today's environment and so everything — and we will come to this — I'm sure everything from inflation to energy policy, to China/US dynamics, et cetera, are issues that I think we need fresh thinking to address. And I believe I offer fresh thinking. 

So there's that sort of alignment of issues and Vikram’s, I think, capabilities, but then also there's a very personal story here. My dad, you know, is celebrating a birthday. He's in his mid-eighties. He was an immigrant who came to the United States, and he said, “Vikram, I've always thought about you as one of the smarter people I know. And hopefully I taught you that if you're not part of the solution, then you're part of the problem. And I'm worried about the future of this country. You had a set of opportunities. Will your son [his grandson], will he have the same set of opportunities? Do you believe that's still available to him?” And the answer? Unfortunately, my answer is no, but I want to restore it. So he does. So there's a public service bug. There's an alignment of issues with what I think I can offer. That sort of dynamic. And that's really what led me to run.

GE Okay. Well, that's certainly a compelling answer. So let's just start off on the policy discussion with something really obvious, and that'd be inflation on Friday. The Labor Department released consumer inflation data for May, and the headline index registered at a 40-year-high of 8.6% versus the prior year. Now, the Federal Reserve has been heavily criticized by many observers and economists for being late in moving to reign in prices. And this is something that really resonates in your campaign announcement. You specifically cited inflation as a core problem facing our economy. Facing your constituents. And I'd like to hear what role you believe the Senate can and should take in fighting inflation since you're running for Senate.

VM Sure. It's a great question, Andrew. I would suggest that the biggest problem driving inflation is spending out-of-control spending out of Washington, DC. And obviously, the Senate has a role to play there. Of course, we printed too much money. We borrowed too much money, and we've got stimulus programs that have enabled people to not work and sort of exit the labor force. So, there are a couple places where the Senate, I believe, I can help alleviate some of the inflationary pressure. One, of course — and we'll probably come back to this, so I'll keep this aside for a moment — is the energy policy that the country has adopted that has driven a reasonable percentage of this inflation. So, that's number one. And let's come back to that. But specifically in terms of stimulus and spending. Everything from the idea of relieving or relinquishing student debt, which would be highly inflationary. That's effectively a one-point-something trillion dollar stimulus if you eliminated all of it.

Now I know there are proposals to eliminate less and some portion, et cetera, but for the extreme to illustrate, it is effectively a stimulus of $1.5 trillion. Spending money using borrowed capital on anything has the possibility of producing inflation, right? So in that regard, all of our spending is subject to, I think, greater scrutiny and should be subject to greater scrutiny. As a business guy, I've always adopted a three-pronged approach to dealing with spending problems. And it's always been number one: Let's have transparency. Let's understand where the capital is going. Where is the dollar being spent? Number two: Let's have accountability. If we think we're getting something for a dollar spent, and we have transparency in our objectives, let's make sure we actually achieve them with that dollar spent. And third: Competition. If in fact we have transparency, we know what we're trying to do. We know how we're trying to do it.

We have to have accountability, even whether it's being done or not. Lastly, we need competition. Because if it doesn't get done, according to what I thought was happening with the transparency and accountability I sought, I want the option to go elsewhere and achieve that dynamic that I'm seeking with all dollars of expenditure. And so in that regard, the spending problem that we have, I think in almost all walks of life, can be addressed with three simple frameworks: accountability, transparency, and competition. Think of education. Think of healthcare. Think of a lot of these dynamics. And in fact, you quickly get to a conclusion that this business logic can actually help address [these dynamics]. And that is definitively a domain where the US Senate can play a role. So I'll… In fact, Andrew, I'll ask you a question. My wife just tore her ACL here at the end of the ski season, and just had an MRI and the ACL repair. Do you know what that cost?

GE I'm not even going to fathom a guess.

VM Yeah, well, I've asked this to various people, and numbers range from $15,000 to $50,000, et cetera. You know what the answer is?

GE By all means, I'd like to know. I have no idea.

VM That's the problem. <laugh> Okay. She has no idea. There's no transparency, no accountability, no competition. Contrast that with when you let the private markets go, and you get insurance out of the way with something like, for instance, LASIK eye surgery. Subject to market competition. Subject to accountability and transparency. The cost of that procedure on various individuals has plunged over the last 30 years. Accountability's going to have transparency there, and, you know, you have better outcomes at lower cost. We need to do that with all [of] government.

GE Moving along, the next question I'm going to ask you touches on energy from a policy standpoint, and obviously that plays in very directly to the discussion of inflation. Also, in your materials for your campaign, you talked about the need to find a balance in energy policy, and without getting too far into the weeds, I wondered how you were proposing that we strike a balance between legacy fossil fuels and transitional fuels. Obviously a lot of people are discussing natural gas as sort of a transitional fossil fuel [between] now and new energy sources. How would you approach legislation covering energy? And to the extent you want to weigh in on it, there's also been a lot of pushback recently from the Republican party on ESG regulations and ESG investments, generally. So that may play into it as well.

VM Yeah, so I do think these are interesting topics. Let's begin with energy. Andrew, I fully believe in an all-of-the-above energy policy. And I think we need to understand that energy powers our economy, and reliable energy should be at the base, the most important form of energy we have because it's economically most productive. What do I mean by reliable? Well, reliable need not only be fossil-fuel–oriented. Nuclear is reliable. Nuclear's clean. Fossil fuels are reliable. Some of them are more or less clean. Natural gas, for instance, is significantly cleaner than coal. And I would even go further to say that we could, in fact, justify on climate sensitivity grounds that we should be producing as much hydrocarbons in the United States as possible. A barrel of oil produced in the United States or natural gas taken out of the ground in the United States is done with more environmental protection than any place else in the world.

And if we think of these markets as fungible, then I would argue to you that a barrel of oil produced in the United States actually is preventing the environmentally unfriendly production of a barrel of oil elsewhere in the world or natural gas elsewhere in the world. And so there is a climate-friendly argument to be made for why hydrocarbons and US energy independence, whether it's shale or whether it's oil and gas reserves that might exist in the Gulf of Mexico or Texas, et cetera, are worth pursuing. So right off the bat, I believe we need to restore US energy independence, and that can be done through this all-of-the-above energy policy. That also means I think that we need not beat up solar, wind, or anything else. So I'm not suggesting that I'm not interested in climate change mitigation. Of course I am.

What I'm opposed to is subsidizing inefficient technologies in pursuit of a climate agenda, when in fact we are living on one planet, and climate change and climate change mitigation is, in fact, a global challenge, so we need global solutions. And sitting here and having China and India build coal-fired power plants rapidly and get the certain benefits of reliable energy. Even when accompanied with the uncertain costs of climate change on their environments and this planet, that is a trade that they've chosen to make or a bet they've made assessing probabilities of costs and benefits. The benefits we are taking are uncertain, while the costs to the American people are absolutely certain. We all feel it at the pump. We feel it in the grocery store. We feel it everywhere that energy is either a bleed-through direct impact or on all goods where it's a less direct impact.

You know, diesel is sitting here north of $6 a gallon. Truckers now are finding it's costing effectively a dollar — roughly said — a dollar or so to travel one mile for a tractor-trailer. That cost is going to bleed through to everything that's moved and freighted around this country. So, we're getting generalized inflation because of energy [costs] into goods and services. And I think that's part of the problem that we're facing. That's part of the inflation problem. And I think the energy dependence that we have on countries that hate us today is also part of the problem because it makes us vulnerable and produces other sorts of challenges that we need to think about. So I'm an all-of-the-above energy guy. I do think that US hydrocarbons are more efficient from a climate change mitigation than, or, — excuse me. No, maybe not more efficient, but better for the environment than hydrocarbons produced elsewhere in the world. And as such, I think if we think about it from a global perspective, we really should be an all-of-the-above, energy-independent nation.

GE Right. But how does that translate into legislation? How is that going to translate into how you would approach it from the floor of the Senate?

VM Yeah, well, so let's talk about the infrastructure spending bill, and how it was subsidizing electrification, et cetera. Those are dollars being spent in ways that are, perhaps, promoting and subsidizing attacks on people who have chosen not to go [with] these expensive vehicles. And I don't think, for instance, taking working-class individuals’ tax dollars so that someone can go buy an expensive electric vehicle and have a charging infrastructure, I don't think that makes sense. And I think that legislation can and should avoid those types of outcomes. Let's talk about roads for a second. If we're on the electric vehicle dynamic. Take two cars. One's an electric vehicle. One is not. Roughly the same size as a mid-sized car. The electric vehicle will be approximately 700 pounds heavier due to the batteries. That is additional wear and tear on the road.

We can come back to that, but because electric vehicles have extra torque, they actually burn through their tires quicker. Tires have some hydrocarbon components in there. But let's go to the budget and maintenance of roads. Electric vehicles actually do create wear and tear on roads. We may not see it every day, but roads do need to be maintained. And road maintenance is currently funded through the highway trust fund. The highway trust fund is funded through gas taxes. And so it turns out that electric vehicle owners are getting the benefit of open roads without contributing to the use of those roads. And so could legislation help correct some of these inequities that are taking place? Yeah, I think it should. And having attention to these types of dynamics would influence how one thinks about things like the recent infrastructure bill.

GE Right. And to the extent that this ties in, because it's such a timely conversation and has so much to do with the dynamic between the investment industry and your party. What do you think about the pushback that we've seen on proposed ESG regulations that have been put forward by the SEC? And also generally, the pushback on ESG investments and firms that are catering to them by certain states. Without getting too into the weeds, do you have any thoughts on that?

VM I think there are folks out there, Andrew, far smarter than I am on the topic of ESG investing. And, you know, I think Cliff Asness was one person who very clearly said there is no scenario under which a constrained portfolio should outperform an unconstrained portfolio, just simply looking at the universe. Because if, in fact, the constrained portfolio is the best one, then you wouldn't need to constrain it to get to it. It would be visible as a subset of the unconstrained portfolio. And so I think of ESG investing similarly. We have to make a social or an investment choice that we are willing to accept potentially lower returns. Now maybe we can debate the time horizon. You can debate a whole bunch of ways to think this through. But you know, let's just sit without getting into the nuances of all those complexities that a constrained portfolio should produce outcomes that are less or attractive than an unconstrained portfolio.

And so from an investment perspective, this doesn't seem to make sense unless there is a non-investment objective. And that's a choice people need to make. And that should be something that's left to the individual. I'm willing to accept less of a return, because I care about the environment. Then you make that choice. Okay. Other people may say, “Give me the max return. I'll choose how to save the environment.” Time mandates are things that I generally don't feel comfortable with in a generic sense, because [they constrain] people's choices. And likewise, if they are the right choice, let's get the right incentives for them to make [them] the right choice, et cetera.

GE Okay. Sure. Moving along away from domestic policy, I just want to hit a little bit on foreign trade and to the extent it intersects with foreign policy. So, the geopolitical order has been disrupted in recent years with China increasingly taking an aggressive position in pursuit of both its foreign policy and its economic goals. And, very obviously, Russia is charting a course of military expansion, which sees no signs of letting up. This, taken in tandem with the adoption of tariffs and protectionist policies in the US in recent years, combined with the pandemic, has disrupted global trade. Your campaign materials have suggested that you favor increasing trade policies that favor some degree of protectionism. I may be misreading that, but that did seem to be something that you favor, but you also reject isolationary foreign policies. I wanted to ask how you proposed to balance those two, if I'm reading you correctly. In other words, how do you balance more of a free trade approach and defense alliances, with some sort of protection for domestic industry?

VM Yeah. So I'm not sure I would characterize anything I've suggested as protectionist, Andrew. But what I would say is I do think there's an increasing desire for self-reliance. And so, I don't think those two are…. Self-reliance need not be protectionistic if you will. So, for instance, I think we should not be dependent on China, who is an increasing global geopolitical rival. We shouldn't be dependent upon them for anything critical to our economy, our healthcare systems, or anything to that effect. We need to have supply chains that are self-reliant or living in geopolitically friendly domains. And what does that mean? That means we have to think about the world in a geopolitical sense as bifurcating. I believe there will be two global economies in some period of time. I can't tell you how quickly, but there will be some period of time where there are two global economies. 

One [will be] likely led by China. Another likely led by the US and the Western world. It'll be a values-based difference, and my guess is you'll find countries trading only with countries in their ecosystem. So, this is not a deglobalization story. This is a different globalization story. Meaning, you know, Australia will trade with the US, but they may trade increasingly less with China. It turns out Vietnam may be more connected into the Chinese ecosystem. Central Asia may be more in the Chinese ecosystem. And countries will have to choose which team they're effectively on. How do we see this? You think countries don't have to choose? Maybe some people say that. I will tell you when a country chooses to upgrade its telecom equipment to 5G, 6G, 7G, whatever it is, they will be forced to see. They'll be forced to make the decision — Huawei or not. That will be defacto a choice.

You're going to be asked, “What [currency] will you price commodities in?” The countries will be making choices in this. How do you vote on a UN general assembly vote? That is effectively making a choice. In aggregate, countries are going to be forced to choose. And I do think this world bifurcates. As a result of that, America really needs to work on restoring resilience and self-reliance in critical areas where we are currently overly dependent on the Chinese ecosystem. There's a couple sectors I’ll just highlight quickly. Number one, we need to get rare earth processing back in the United States. We're working on that. That's going to happen. Semiconductors. We need to get semiconductor production in the United States. We're working on that. It's happening. We need to get active pharmaceutical ingredients back in the United States, not run through China. Whether that's vitamin C or acetaminophen, or even some other pharmaceutical ingredients, we need to not be dependent on China for those. We're working on that. So I think there is a process here that over the next three, five, seven years, that we will see ourselves increasingly disconnected from the Chinese ecosystem. And that will have interesting implications for trade and other patterns, right? So countries that we currently supply with our goods may choose to go secure their goods elsewhere. Other countries, which weren't taking product from the United States, if they're in our ecosystem may find that it makes sense. So I think it's shifting trade patterns and shifting market access that will result from these dynamics.

GE Okay. So how, from a practical standpoint — and you don't have to go in depth — but can you give me any specific bullet points on, or any examples of how legislation might support America's best interests in this scenario?

VM Sure. So we've seen, for instance, in the rare earth processing an enabling and support with government grants an encouragement of development of US processing capacity on critical ingredients. It may be that we support funding some stockpiles of ultra-critical ingredients. We know the defense department does that through the defense budget and some of the allocations of the legislature. The same thing with — I forget what the current iteration of it was called — but it was the United States Innovation and Competition Act. And then it was the Competes Act for a period of time. And, you know, politically at one point <laugh> the Republicans called it the [Democrats’ America] Concedes Act. So, you know there will be legislation. You might even go so far as to call it industrial policy that emerges to help channel and support some areas of critical geopolitical importance. So, while I'm generally a believer in free markets and trade and let the markets allocate capital and don't pick winners, I do think there are some industries where the heightened vulnerability that we currently have to China is enough of a risk to justify supporting an industry, to get it up and standing on its two feet in the United States quickly. And time is of the essence in this regard.

GE Okay. Well I've taken up a tremendous amount of your time, but I do want to hit on one thing, and this sort of ties in nicely with the free markets. And this is obviously something that also resonates with me personally when we talk about the importance of free markets and balancing that with regulation. You know, the checks and balances between free market and avoiding free market excesses. I started my career working as a derivatives structurer at investment banks. I was very, very good at my job. And that means that I was very good at often circumventing the spirit of regulations, the spirit of tax laws, and accomplishing a lot of things that may not have been in the best interests of the economy as a whole [but were] potentially in the interests of the counterparty — whatever company or pension or what have you — and were most certainly in the best interests of the investment bank that was going to pay me that big bonus.

And so maybe my view is jaundiced as a result of that life experience, having spent so much time trying to construct and exploit loopholes. But the last question I have for you and this ties in neatly with your feeling on free markets. You have been presented as an expert on financial asset bubbles and on the impact of financial asset bubbles on economies. We've just gone through an extreme period where we've experienced multiple bubbles in rapid succession. Do you see any asset bubbles or asset-like bubbles in our economy right now that represent a threat, and are any of them not the obvious ones that we're thinking about? Are there any sort of under-the-surface ones that you're seeing?

VM Well, I would say, Andrew, that we've seen — because of the interest rate environment of rising rates — we have seen, in fact, some of the more bubbly areas, the long-duration assets that have benefited from very cheap money at low costs and therefore, you know, low discount rates, and so cash flows in far-out years being worth a lot. Um, the minute you change your discount rate, some of these companies lose material, sort of, discounted net-present value, um, in that world. And so we've seen that with some of the tech sector getting hit as we've seen inflationary pressures and some of these high-growth companies that have, you know, big numbers in out years. Um, so I think some of that's already come out. What I find fascinating is housing has not come down anywhere near as rapidly as I would have expected.

We're starting to see some signs of softening, but let me give you some quick math that I did the other day. Interest rates, I don't know, six months ago were 3% for a 30-year mortgage. Today, they're roughly 6%. I did some math assuming a family was buying a $500,000 home. They saved $100,000 and take out a $400,000 mortgage. At 3%, that mortgage is, call it, $1,750 for ease of math per month for principal and interest. At 6%, that gets closer to $2,500. So there's a pinch on consumer spending if that price is to stay the same. The other way to do that analysis is to say their budget is the same, and their savings and down payment is the same. How much mortgage can they afford at the new cost of capital?

And here, the number falls from $400 [K] towards $275 [K], meaning you can imagine that house price falling from $500 [K] towards $375 [K]. That is a material drop in value that might leave some people upside down on their mortgages in a different way, but for sure will make people feel less wealthy. And when they see that access to credit may dry up, and that could snowball into other things. We've just recently seen that consumer debt has gone up materially in the last few months. So that's a problem. And I think we can have some real ripples from a loss of confidence, from a loss of housing equity, and a feeling psychologically of having lost a lot of money. That could have an impact on tax revenues. If we get markdowns on tax-assessed values, those tax-assessed values being marked down could ripple into state and local budgets, which are currently improving. Ultimately this could result in greater debt levels for lots of different entities and for sure greater leverage levels, creating all sorts of problems. That's just one example that could come through from higher interest rates affecting a highly leveraged asset class. There are lots of examples like this.

GE Okay, well, listen, I've taken up a lot of your time. I know that you're busy running a campaign, and you've got all kinds of other obligations on top of that, both academic and familial, so I think we should probably end there. Thank you so much for joining us today. And we look forward to talking to you again in the future, perhaps when you're a member of the Senate.

VM <laugh> That would be wonderful. Andrew. Thank you. Thank you for your time.

GE Okay. Thank you.