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Tuesday, March 27, 2012

MUST READ! A Conversation with Peter Thiel

Francis Fukuyama: I’d like to begin by asking you about a point you made about there being certain liberal and conservative blind spots about America. What did you mean by that?

Peter Thiel: On the surface, one of the debates we have is that people on the Left, especially the Occupy Wall Street movement, focus on income and wealth inequality issues—the 99 percent versus the 1 percent. It’s evident that both forms of inequality have escalated at a very high rate. Probably from 1973 to today, they have gone up faster than they did in the 19th century. The rapid rise in inequality has been an issue that the Right has not been willing to engage. It tends either to say it’s not true or that it doesn’t matter. That’s a very strange blind spot. Obviously if you extrapolate an exponential function it can go a lot further. We’re now at an extreme comparable to 1913 or 1928; on a worldwide basis we’ve probably surpassed the 1913 highs and are closer to 1789 levels.

In the history of the modern world, inequality has only been ended through communist revolution, war or deflationary economic collapse. It’s a disturbing question which of these three is going to happen today, or if there’s a fourth way out. On the Right, the Tea Party argument has been about government corruption—not ethical violations necessarily, but inefficiency, that government can’t do anything right and wastes money. I believe that is true, and that this problem has gotten dramatically worse. There are ways that the government is working far less well than it used to. Just outside my office is the Golden Gate Bridge. It was built under FDR’s Administration in the 1930s in about three and a half years. They’re currently building an access highway on one of the tunnels that feeds into the bridge, and it will take at least six years to complete.

Francis Fukuyama: And it will require countless environmental permits, litigation, and so on.

Peter Thiel: Yes. There’s an overall sense that in many different domains the government is working incredibly inefficiently and poorly. On the foreign policy side you can flag the wars in the Middle East, which have cost a lot more than we thought they should have. You can point to quasi-governmental things like spending on health care and education, where costs are spinning out of control. There’s some degree to which government is doing the same for more, or doing less for the same. There’s a very big blind spot on the Left about government waste and inefficiency.

In some ways these two debates, though they seem very different, ought to be seen as two sides of the same coin. The question is, should rich people keep their money or should the government take it? The anti-rich argument is, “Yes, because they already have too much.” The anti-government argument is, “No, because the government would just waste it.”

I think if you widen the aperture a bit on the economic level, though I identify with the libertarian Right, I do think it is incumbent on us to rethink the history of the past forty years. In particular, the Reagan history of the 1980s needs to be rethought thoroughly. One perspective is that the libertarian, small-government view is not a timeless truth but was a contingent response to the increasing failure of government, which was manifesting itself in the late 1960s and early 1970s. The response was that resources should be kept in the private sector. Then economic theories, like Laffer’s supply-side economics, provided political support for that response, even if they weren’t entirely accurate. We can say that the economic theories didn’t work as advertised, but for Obama to try to undo Reagan-era policies, he would have to deal with the political realities those theories were confronting. We cannot simply say things went wrong with credit creation in the 1980s; we also have to deal with government malfunction in the 1970s.

So you have these two different blind spots on the Left and Right, but I’ve been more interested in their common blind spot, which we’re less likely to discuss as a society: technological deceleration and the question of whether we’re still living in a technologically advancing society at all. I believe that the late 1960s was not only a time when government stopped working well and various aspects of our social contract began to fray, but also when scientific and technological progress began to advance much more slowly. Of course, the computer age, with the internet and web 2.0 developments of the past 15 years, is an exception. Perhaps so is finance, which has seen a lot of innovation over the same period (too much innovation, some would argue).

There has been a tremendous slowdown everywhere else, however. Look at transportation, for example: Literally, we haven’t been moving any faster. The energy shock has broadened to a commodity crisis. In many other areas the present has not lived up to the lofty expectations we had. I think the advanced economies of the world fundamentally grow through technological progress, and as their rate of progress slows, they will have less growth. This creates incredible pressures on our political systems. I think the political system at its core works when it crafts compromises in which most people benefit most of the time. When there’s no growth, politics becomes a zero-sum game in which there’s a loser for every winner. Most of the losers will come to suspect that the winners are involved in some kind of racket. So I think there’s a close link between technological deceleration and increasing cynicism and pessimism about politics and economics.

I think, therefore, that our problems are completely misdiagnosed. The debates are all about macroeconomics, about how much money we should print. I think you can print more money and have inflation, or stop printing money and have deflation. Bad inflation involves commodity prices and inputs, and bad deflation involves people’s wages, salaries and house prices. But the middle-way Goldilocks version, where commodity prices and consumer goods go down and wages go up, seems very farfetched. I don’t see how that sort of outcome can be crafted in a world with no growth.

Francis Fukuyama: I understand you’re part of the inspiration behind Tyler Cowen’s book The Great Stagnation. Apart from being a former colleague of mine, he’s on the editorial board of The American Interest.

Peter Thiel: He did very graciously dedicate the book to me, and it’s an incredibly powerful articulation of this theme on many different levels. I think the question of technological dynamism isn’t often examined, but when you look into it you see many problems, from transportation failures to the space program and the Concorde decommissioning to how the energy failure allows oil price shocks to undo the price improvements of the previous century. Think of the famous 1980 Paul Ehrlich-Julian Simon wager about resource scarcity. Simon may have won the bet a decade later, but since 1993, on a rolling decade basis, Ehrlich has been winning famously. This is something that has not registered with the political class at all.

Francis Fukuyama: That’s an early sign that we may be moving into a zero-sum world.

You made your fortune initially in Silicon Valley. Your assertions may raise a lot of eyebrows, because skeptics would say, “What about the whole boom of the 1980s?” There’s that famous Robert Solow quote from 1987, “You can see the computer age everywhere but in the productivity statistics.”1 Econometricians finally began detecting that productivity jump in a more significant way in the 1990s. I would think that rather than arguing in general that there has been a technological slowdown, the more socially important argument is that the distributional impact of all the cutting-edge technological changes that have occurred over the past generation go overwhelmingly to the smart and well-educated. If you had great math skills during the agrarian economy of the 19th century, there weren’t many jobs where you could exploit that and get really rich. Now you can go to Wall Street or become a software programmer. So there’s something about the progress we’ve had that has overlain the increasing inequality you’ve pointed to.

Peter Thiel: I don’t entirely agree with that description. My claim is not that there has been no technological progress, just deceleration. If we look at technological progress during most of the 19th and 20th centuries, it brought significant disruption. If you built horse buggies for a living, you would be out of work when the Ford Motor Company came along. In effect, over time labor was freed up to do more productive things. And on the whole, people got to be better off. I think the larger trend is just that there has been stagnation. There are debates about how to precisely measure these statistics, but the ones I’ve looked at suggest that median wages since 1973 have been mostly flat. Mean wages have gone up maybe 20–25 percent, which is the greater inequality, an anemic 0.6–0.7 per year. And if you confiscated the wealth of all the billionaires in the United States, the amount would pay for the deficits for only six months. There has been this increase in inequality, but it’s a secondary truth. The primary truth is this truth of stagnation.

As for why inequality has gone up, you could point to the technology, as you just have. You could also point to financialization of the economy, but I would say globalization has played a much greater role because it has been the much greater trend. Even though there have been a lot of bumps in the road, your “End of History” strikes me as very much true today. Globalization has been incredibly powerful, far more so than people could have realistically expected in 1970. The question is, what is there about globalization that creates a winner-take-all world? There certainly has been a labor arbitrage with China that has been bad for the middle class, as well as for white-collar workers, in the past decade or two.

Consider, too, that in 1960 we spoke of the First World and the Third World; today we speak of the developed world and the developing world, the part that is looking to copy the West. The developed world is where we expect nothing more to happen. The earlier dichotomy was fairly pro-technology and in some ways more agnostic on the prospects for globalization. The present dichotomy is extremely bullish on globalization and implicitly pessimistic about technology. Of course, we can point to the great fortunes that have been made in the tech industry, but of the great fortunes that have been made in the world over the past twenty or thirty years, most have not been made in technology. Look at the Russian oligarchs. Maybe one out of a hundred billionaires has a tech-related fortune. The others are a political thing linked somehow to globalization. So that’s why I think it’s important to quantify these things correctly. We tend to focus a lot on the optimistic tech narrative that notes a lot of progress, but I think the more important question is why it hasn’t been happening.

There certainly are a lot of areas of technology where, if it were progressing, we would expect a lot of jobs to be created. The classic example would be clean technology, alternate energy technology. If you were to retool the economy toward more efficient forms of energy, one would realistically expect that to create millions of jobs. The problem with that retooling is that the clean technology just doesn’t work—namely, it doesn’t do more for less. It costs much more, so it isn’t working—at least not yet.

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