The Bureaucrats Gone Wild Edition

Summary

Slate Money – The Bureaucrats Gone Wild Edition (May 27, 2017)

Overview

This episode of Slate Money, hosted by Felix Salmon alongside Anna Shymansky and Jordan Weissman, dives into the interconnected worlds of political corruption, economic reform, oil markets, and bureaucratic language. The team offers a whirlwind tour of recent headlines: Brazil’s turmoil over corruption scandals and economic reform; Saudi Arabia's struggles with oil market transformation in the age of fracking; and the World Bank's internal fight over economist Paul Romer’s campaign against “bankspeak.” The tone is sharp, witty, and deeply informed, with each topic tied back to big-picture questions about governance, growth, and the power (or powerlessness) of bureaucracies.

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Key Discussion Points & Insights

A. Brazil’s Political Chaos and Market Fallout (01:13–14:43)

• Backdrop: President Michel Temer's corruption scandal after audio tapes surfaced tying him to bribe payments. Temer himself had only recently succeeded Dilma Rousseff, who was impeached (not for corruption, but “creative accounting”).
• Systemic Corruption: The discussion highlights the pervasive nature of bribery, particularly emphasized by the “Lava Jato” (Car Wash) scandal involving state oil company Petrobras and nearly every major political party.
  • Anna: “If you look at like world corruption lists, Brazil isn’t even in the top 10. I don’t even think they're in the top 20.” [05:07]
• Impact on Markets: The Brazilian stock market (Bovespa) and real fell dramatically amid political turmoil. The underlying concern for investors is not corruption per se but the threat to much-anticipated economic reforms, particularly pension, tax, and labor reforms.
  • Anna: “The reason the markets are freaking out is because they think that pension reform isn’t going to go through.” [09:23]
  • Felix: “How do you price in corruption when you’re looking at an economy as a place to park your money?” [11:09]
  • Anna: “If you have just endemic corruption, it stops a number of foreign investors from the US and Europe from really getting involved…they can’t get involved with systems that are quite that corrupt.” [11:24]
• The Corruption Cycle: They link corruption with entrenched inequality and the tendency of elites to resist economic modernization, keeping countries mired in the “middle-income trap.”
  • Anna: “What corruption does is it really solidifies income inequality...the elites...have no incentive to modernize the economy.” [13:35]

B. Saudi Arabia, OPEC, and the Fracking Revolution (14:43–31:06)

• Economic Strain: Saudi Arabia’s budget is under strain due to persistently low oil prices, imperiling the social contract by which the state subsidizes the population to ensure domestic stability.

  • Jordan: “The way you kind of keep [extremists] under control is by throwing money at them.” [15:55]

• Oil Market Power Eroded: Saudi strategy has shifted:

  • Act 1: Boosting production to undercut U.S. frackers (hoping to wipe them out).
  • Act 2: Cutting production (OPEC and Russia) to try to support prices.
  • Act 3: Exploring future diversification, e.g., floating Aramco on public markets.
  • Felix: “They thought that the frackers wouldn’t have as easy a time getting access to affordable capital, which ended up not being the case.” [25:20]

• Why the Frackers Survived: Despite huge losses “…private equity types…doubled down, and now there’s a real war.” [19:49] The fracking industry became more efficient, achieved lower break-even costs, and was propped up by eager private equity, fundamentally shifting market dynamics.

  • Anna: “These [surviving] companies are potentially much more profitable now...the break-even price has declined.” [21:37]

• The Aramco Question: Saudi’s plan to diversify its economy and list Aramco publicly faces skepticism. The hosts express doubt about the touted $2 trillion valuation and question whether the IPO will proceed as planned.

  • Jordan: “It’s an interesting open question whether they are going to do it or not.” [26:57]

• Changing Energy Landscape:

  • The conversation touches on the rise of renewables and the specter of “peak demand” for oil, with even BP predicting a likely peak around 2035.
  • Felix: “After one storm hits, there’s another coming for them...” [29:58]
  • Anna: “If a lot of petro states would be forced to diversify their economy, I think that would be really good for the population...” [30:36]

C. Paul Romer and the War on Bankspeak at the World Bank (31:06–42:29)

• Paul Romer’s Crusade: As newly minted World Bank chief economist—with a Nobel-worthy reputation—Romer tried to tackle the impenetrable, jargon-laden language (bankspeak) dominating the Bank’s reports, pushing instead for clear, grounded analysis.
  • Jordan: “He’s turned into a scourge upon the profession, let’s put...maybe a good scourge.” [32:14]
• Literary Analysis: The episode references a Stanford Literary Lab study tracing the shift in World Bank language from tangible (“food, health, agriculture”) to bureaucratic abstraction (“strategies, programs, policies”). Romer’s focus: What does all this language mean for real-world poverty reduction?
  • Jordan (reading from the study): “The words surrounding the term ‘poverty’ are things like total cost, income, services… The words surrounding ‘poverty reduction’ are ‘strategies, programs, policies, focus, management…’” [36:57]
• Resistance and Fallout: Romer’s efforts to reform language and mission met fierce internal resistance. His management authority was stripped. The hosts speculate on whether this was just style, or the substance of his challenge to the institution.
  • Felix: “He may have had the right idea and been the wrong guy.” [42:55]

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Notable Quotes & Memorable Moments

• Anna Shymansky on gender and corruption:
  “Lula apparently got $50 million in bribes, while Dilma only got $30 million in bribes. So women just don’t exactly get paid as much as men.” (03:46)

• On the intractability of reform in corrupt economies:
  Anna: “You get...lots of discontent among the population because they have no opportunity. So then…they elect populist leaders, but then the populist leaders are often the worst in terms of frankly, corruption.” (13:35)

• Jordan Weissman on Saudi social policy:
  “…the way you kind of keep them under control is by throwing money at them.” (15:55)

• Felix Salmon taking a victory lap on fracking predictions:
  “Several years ago…I suggested this might happen, that essentially that US frackers would now become the new swing producer…you told me, no, that’s not going to happen. That’s ridiculous.” (19:49)

• On management-babble at the World Bank:
  Jordan (quoting): "...promote corporate governance and competition policies and reform and privatize state owned enterprises and labor market social protection reform. There is greater emphasis on quality responsiveness and partnerships, on knowledge sharing and client orientation and on poverty reduction.” (38:20)

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Important Segment Timestamps

• Brazil’s corruption and markets – 01:13–14:43
• Saudi Arabia, oil markets, and fracking – 14:43–31:06
• World Bank, Paul Romer, and bankspeak – 31:06–42:29
• Numbers round – 43:11-end

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Numbers Round Highlights (43:11–end)

• Felix Salmon: 38,000 tons – sand needed for 1 mile of American interstate, referencing a New Yorker article on looming sand shortages.
• Anna Shymansky: 164% – China's corporate debt-to-GDP ratio, cited in the wake of a Moody’s downgrade.
• Jordan Weissman: 16% – Estimated drop in international tourism to the U.S. as observed by Foursquare data, possibly due to the anti-immigration rhetoric of the Trump administration.

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Tone and Style

The hosts balance intellectual rigor with humor and frankness. They’re skeptical of easy answers and self-important bureaucrats, always pushing for clarity, groundedness, and real-world impact. The episode is packed with pithy asides, teasing, and occasional deadpan jokes about economics, politics, and the particular madness of the week’s financial news.

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Recommended if you want:
– A sharp, globe-hopping discussion of political corruption and economic reform
– An accessible, entertaining dive into oil market power shifts
– A war story about an economist’s doomed struggle to make bureaucracy speak plainly
– Plenty of quips, skepticism, and wonky yet real-world analysis

Transcript

[Felix Salmon]

The following podcast contains explicit language.

[Jordan Weissman]

Hello, and welcome to the Bureaucrats Gone Wild edition of Slate Money, your guide to the business and finance news of the week. It's been a busy week. The President of the United States has been jetting all over the world, including to Saudi Arabia. We're going to talk about what exactly is going on there. We're going to talk about Saudi Arabia, the oil price and what that has to do with venture capitalists and private equity types in the United States. It's all connected. We are going to talk also about the World bank and specifically its chief economist, Paul Romer, and his war against what is known as bank speak. Going to want to listen to some of this bank speak. It's kind of awesome stuff. So that's all to come. I am Felix Salmon of Fusion. We are joined as ever by Anna Shymansky and Jordan Weissman. Hello people.

[Anna Shymansky]

Hello.

[Jordan Weissman]

And I think that first we should talk about Brazil.

[Felix Salmon]

I think so.

[Anna Shymansky]

I think we should.

[Jordan Weissman]

So why are we talking about Brazil?

[Anna Shymansky]

We are talking about Brazil because over the past few weeks another president with very low approval ratings facing calls for resignation and possible impeachment as a result of corruption allegations has been in the news. And this is in fact Michel Temer, the current President of Brazil, who's been implicated in an ongoing corruption scandal after an audio tape was released appearing to prove that he had sanctioned a number of bribe payments.

[Jordan Weissman]

Now I mean, he hasn't been president very long.

[Anna Shymansky]

He has not, because he took over after Dilma Rousseff was impeached last year. Now it's important to remember, remember that Rousseff was actually not impeached because of the corruption scandal. She was impeached for what we like to call an em. Creative accounting.

[Jordan Weissman]

But the fact is she was corrupt.

[Anna Shymansky]

She was.

[Jordan Weissman]

And her predecessor, Lula. Lula, who we all know and love, was also corrupt.

[Anna Shymansky]

Yes.

[Jordan Weissman]

It seems to be the case that it takes what, 10 minutes after assuming the presidency to just start like becoming unbelievably corrupt, both accepting and paying enormous amounts of bribes.

[Felix Salmon]

Well, I think people are also corrupt in Brazil before they assume the presidency as well. You don't have to. Wait, wait, Felix.

[Jordan Weissman]

Brazil is in turmoil in 140 characters or less. Anna, what exactly is the corruption scandal in Brazil?

[Anna Shymansky]

So there are a number of scandals, but the central one is the Lava Giato corruption scandal which involves kickbacks paid to the state owned oil company Petrobras that implicated at this point essentially every political party and many of the biggest industries in Brazil. The Bribes that were paid. At this point, we're looking at over 6.4 billion reai.

[Jordan Weissman]

And what's that in dollars right now?

[Anna Shymansky]

I think it's what we're 3.27. So it's a little over $2 billion.

[Felix Salmon]

So what basically happened was Petrobras, the state oil company, would hire these construction contractors at inflated rates and have these kind of pretend competitions. And then the contractors would kick back money to some of the executives at the oil company, who then in turn would go and pay bribes to politicians who were influential in deciding essentially how the oil company was managed. Because it's mostly state.

[Anna Shymansky]

Yes. And again, a lot of this money would just be funneled especially to the Workers Party, which is the party of Dilma Rousseff and Lula Silva.

[Jordan Weissman]

And in terms of income inequality, we can also add that lula apparently got $50 million of bribes, while Dilma only got $30 million of bribes. So women just don't exactly paid as much as men. All right, as the emerging markets sort of finance type, you can tell us what's happened to stock prices in Brazil.

[Anna Shymansky]

So we did see a bit of a move downwards in the Bovespa, the Brazilian equity market, as well as the value of the real, the Brazilian currency. Now, there's been some recovery, and if you look at overall trends, the real is still fairly strong. The market is still somewhat strong. But this has been one of the first real instances of market jitters in an EM economy.

[Jordan Weissman]

And there was one day where the market fell like over 10% in one day.

[Anna Shymansky]

But if you look at an overall trend, it's still relatively high compared to where it was, say, before Rousseff was impeached.

[Jordan Weissman]

So what we have is, as you say, a case of political turmoil turning into market turmoil. But more to the point, we have a case of a country which just seems to be impossible to govern without, just astonishing levels of corruption.

[Anna Shymansky]

And I don't think this is specific to Brazil. This is. This is what happens in pretty much every EM economy. If you look at, like, world corruption lists, Brazil isn't even in the top 10. I don't even think they're in the top 20.

[Jordan Weissman]

Now, you see, I disagree about this. I think, and I disagree in part based on this rather excellent businessweek piece about, like, the whole history of corruption in Brazil and how it all dates back to the emperor in the late 19th century. He was just kind of installed. This Portuguese guy gets installed, and there's this court and that feeling of like having an emperor in a Court never really went away. And it's certainly true, even absent illegal corruption, that some enormous amount of.

[Felix Salmon]

Sort.

[Jordan Weissman]

Of upper middle class civil society in Brazil is made up of politicians paying themselves enormous salaries, giving themselves enormous pensions, and not really producing anything.

[Anna Shymansky]

Right. But name an em country for me where that is not the case.

[Jordan Weissman]

Well, how about Chile next door?

[Anna Shymansky]

Well, and actually, Chile has recently been reforming, so they're potentially an example of where when you start to crack down on corruption, you start to see some benefits.

[Felix Salmon]

So this all kind of gets to the big question I have, and I should say at the start here, that I have not been following Brazil's story closely for months and months and months. Some people have been addicted to this soap opera. But I've started reading about it and it kind of in a weird way brought me back to some of my college courses in political science. And Felix is giving me kind of a look right here. But I promise this is going somewhere. So there's like, I had this professor named Jeffrey Winters, and he specialized in kind of emerging economies, politics, especially Southeast Asia. And he had this theory that said that corruption was essentially not deadly for an economy, that it could be managed as long as it was predictable. Right. As long as you could have this sort of like, you could have this thing where bureaucrats are paying themselves huge salaries and skimming some money from projects like oil companies, whatnot. As long as everyone kind of understood how the system worked. And there was someone kind of. His term was taming the oligarchs, taming all these people doing it, it was okay. And so to me, it seems like the markets have all sort of internalized that idea that you can do business in these places as long as the corruption is predictable. But now you've got Brazil where markets are freaking out and everything seems to be falling apart despite years of absolutely predictable corruption.

[Jordan Weissman]

And I think there are two reactions to that I would make. Number one is I think that your professor was spending too much time looking at Indonesia.

[Felix Salmon]

Okay.

[Jordan Weissman]

And Indonesia is. Has always been the poster child for, look, you can have enormous growth and corruption in the Suharto era.

[Felix Salmon]

Yeah.

[Jordan Weissman]

And it was true. And I think that it's a little bit dangerous to extrapolate from Suharto to the rest of the world and especially to Brazil. Second, Brazil was not nearly as openly corrupt as Suharto was. Suharto, everyone knew, was corrupt. He had like, just billions of dollars, and it was open, and he was the. He ran the country with an iron fist, and there was nothing anyone could do about it. What you have in Brazil with the secret payments from companies like Odebrecht and Petrobras to the government was actually surprising to a lot of Brazilian society. When these payments came out, the extent.

[Anna Shymansky]

Of it was surprising.

[Jordan Weissman]

And then finally, I would just say that the markets sort of freaking out about this is not really them freaking out about the corruption, it's them freaking out about the political implications, which is that because every single politician in Brazil is presumptively tainted by this, and because Brazil is clearly fed up with it and wants to like kick all of the bums out, there is a real risk that there's not going to be anyone left to run the country.

[Anna Shymansky]

The reason the markets are freaking out is because they think that pension reform isn't going to go through.

[Felix Salmon]

Do you mind unpacking that a little bit?

[Anna Shymansky]

Yeah. So essentially when Tamir came in, one of the reasons that so much money started to flow back into Brazil was because there was the expectation that he was going to push through pension reform, labor market reform and tax reform that was going to liberalize the economy, make it less rigid. And also they have a very unsustainable pension system. And so he was going to help reduce the fiscal deficit because they have a very, it's like 10% fiscal deficit. So he was going to help reduce that and make it more business friendly and more apt to have long term growth. So now the fear, and again, I would argue that part of the reason that we haven't seen quite the sell off, you really would anticipate it because people still think like, well, maybe the next guy who comes in can push this through. But the real concern is about structural reform more than anything else. Because I really, I found this fascinating when the Brazilian crisis was going on was that people started, investors started to price in pension reform almost before Rousseff was even impeached. Just when it became clear that she was probably going to be impeached, you started to see money flowing back into these markets and, and partly because you had had some underpricing of decent assets and a number of other much more complicated reasons. But I think it again goes back to markets wanting to believe these positive stories.

[Jordan Weissman]

And markets also just missing the big picture. Right. Like, they can look at the economics and they love looking at the economics, but what they're missing is this big idea that the country will put up with a certain amount of corruption until it won't. And, and that when that happens, the, the entire civil society can just fall apart.

[Felix Salmon]

This is what I kind of wanted to Ask you, Anna, which is, as someone who actually has been on the investor side dealing with emerging market economies, how do you price in corruption? How do you think about corruption when you're looking at an economy as a place to park your money or whatnot?

[Anna Shymansky]

Yeah, and this is really important because in em, you kind of talk about counterparty risk. Now this is a really big deal if you're talking about private investments, because as an American investor you have to be very clear that the people you're investing with are not involved in corruption. I mean that's actually really important. And I think this is goes back to a larger issue in terms of why when a society is very corrupt, it can get to a certain level of growth, but it can't get past that because if you have just endemic corruption, it stops a number of foreign investors from the US and Europe from really getting involved because they're, they can't get involved with systems that are quite that corrupt.

[Jordan Weissman]

Although, you know, I mean, I remember the Korea crisis of 1997, 98, where a whole bunch of very corrupt chaebols started sort of falling apart because the currency was in trouble. But the fact is that in the decades leading up to the late 90s, Korea did very well despite, and had high levels of economic growth despite also having quite a lot of corruption.

[Anna Shymansky]

Right. But you also have to look into what's fueling that. And I. So with Brazil in particular, I also think it's easier to have corruption when you have a commodity boom and you have tons of money flowing in.

[Felix Salmon]

It sounds a lot like sort of the way any boom will paper over, you know, bad business practices. And like in the US the how when everyone was making money off the housing bubble, people were happy to throw their money at subprime mortgages and whatnot. And then when the tide came out, you know, you saw who was wearing a swimsuit or what.

[Jordan Weissman]

Yeah, I think it's different than that. I think commodity booms are different. I think that you can actually draw a distinction between corruption in large commodity exporters like say Nigeria or Brazil, and corruption in countries which are less based on commodity exports like say Indonesia or Korea. And that where you have the leaders just simply basically extracting rents from oil exporters, that is going to leave a country without a lot of underlying economic vitality.

[Anna Shymansky]

And I think that that's actually really important. If you want to talk about long term growth and why corruption is such a big problem is because what corruption does is it really solidifies income inequality in a lot of these nations. We See that especially in Brazil, there's been some reduction in income inequality, but it still is a very inequitable society. And the problem is that when this happens, the elites, which often are connected with the government, have no incentive to modernize the economy, liberalize the economy, because they're essentially just extracting rents, making lots of money. And so then what happens is you get, not surprisingly, lots of discontent among the population because they have no opportunity. So then what often happens? Well, they elect populist leaders, but then the populist leaders are often the worst in terms of frankly, corruption. And so it just creates this cycle that you can't get out of and it really hurts a lot of developing economies and stops them from ever really getting out of that middle income trap. They, they essentially constantly hit a ceiling in terms of what they can achieve because of this endemic corruption. Again, we don't just see it in Brazil, we don't just see it in Latin America. We see it in a lot of the former Soviet.

[Jordan Weissman]

Well, I mean this is, this is the perfect segue. I have to kind of like do this at this point that we are now going to talk about Saudi Arabia. Right? I mean, in Saudi Arabia it is so entrenched that the ruling elite just extract all of the rents from the commodity exports that you don't even call it corruption. It's just like they own it. But let's do that. Let's talk about what on earth is going on in Saudi Arabia because it's is in a lot of economic pain right now. So Jordan, can you draw the line here to Saudi Arabia? What kind of plight is Saudi Arabia in right now economically?

[Felix Salmon]

They're not making enough money. And that's because of oil prices.

[Jordan Weissman]

Oil prices are too low.

[Felix Salmon]

Oil prices are too.

[Jordan Weissman]

And they have a massive. Because of exactly what Anna was talking about. They need to spend a lot of money to keep the people happy.

[Felix Salmon]

Yeah, this is, I think slightly different than because it's like you said, it's more formalized. So Saudi Arabia needs oil prices fairly high just to fund its state budget and pay for its lifestyle. That's just how its economy works. It's a petro state.

[Jordan Weissman]

But to be clear, the thing they need to pay for is precisely what Ana is talking about. There's a bunch of non royal family people in Saudi Arabia who are very extremist and angry and want to blow up the world. And the way you kind of keep them under control is by throwing money at them.

[Felix Salmon]

That is part of. Yes, that is part of the scheme that is part of, that is part of the hustle in Saudi Arabia.

[Anna Shymansky]

Yeah, this is what we see in frankly, a lot of petro states where you have reduced freedoms for most of the people, lack of economic opportunity, but they pay no taxes, their energy essentially costs nothing. And this is essentially the bargain that the population has with the leadership.

[Felix Salmon]

And, you know, since the 1970s, this hustle worked pretty well for Saudi Arabia because it was for the ruling party. For the ruling party, yeah. Right. But because it was essentially what we call swing, you know, the swing producer, the royal family. Yeah. You know, the idea was that Saudi Arabia had the power to essentially draw up its oil production or draw it down in order to sort of manage prices the way it wanted. And sometimes during some periods this worked better than others. But it could sort of dictate, with the help of opec, the, you know, the, the status of the global oil market. It could basically decide what prices were going to be. And that sort of seems to be falling apart and has been falling apart for a long, for several years now. And we got another kind of bit of news this week that showed how that whole framework was deteriorating.

[Jordan Weissman]

So what is this piece of news, but what's the news hook here?

[Felix Salmon]

Well, so the news hook is that OPEC has decided to keep production cuts that it agreed to in November for another, for another nine months, I believe for another several months. And so you might recall the way oil prices basically collapsed a few years ago.

[Anna Shymansky]

Right, just like November 2014.

[Felix Salmon]

Yeah, it was basically. Yeah, right.

[Anna Shymansky]

You, those few weeks after were, oh, my God, I just remember, like watching the Russian market because it's so aligned with oil prices.

[Felix Salmon]

It was, yeah, the ruble just like was. Seemed like it was going to be worthless. I mean, it was, it was, it was a heady time. Right. And so oil prices fell by more than half and Saudi Arabia was sitting and it had this kind of question hanging. What was it going to do? Was it going to cut back production on its own in order to try and stabilize the market? Or, or was it just going to keep the pumps going? And it decided to just keep pumping, keep drilling.

[Jordan Weissman]

And, and this was considered to be a kind of tactical move to drive all of the frackers in America out.

[Anna Shymansky]

Of business and also essentially to solidify market share. And the idea was they would really strengthen their relationship with their core consumers. They're not, I mean, the Saudis aren't stupid. They understood that at some point prices come back up. Then the frackers, these new kind of shale drillers are going to come back online. But the idea was they would have already really kind of solidified these consumer relationships. So.

[Jordan Weissman]

So the way I think about this is that Saudi Arabia basically got into a pissing contest with the Frackers, saying that, okay, we can pump oil till, like, you know, like, there's no tomorrow. And we can do that with low oil prices because our cost of oil is very low. And you can't. You're going to lose money on every barrel if prices are this low. And so you're going to have to shut down shop, and then it's going to be our game again. And the Frackers, that did actually happen. And in the first instance, a bunch of places shut down. But what has happened, which is absolutely fascinating to me, is, is that the private equity types who had pumped a lot of money into these US Oil companies and lost all of that money responded by putting even more money, doubling down. They doubled down, and now there's a real war.

[Felix Salmon]

Yeah. And so. And it's because they recognize something. And I want to take a little victory lap here, Felix, because several years ago, you might not remember this, but I do. I suggested this might happen, that essentially that us Frackers would now become the new swing producer. They would be in that position that they could adjust their production up and down to be kind of moderate global oil prices. And you told me, no, that's not going to happen. That's ridiculous. And instead, that's essentially the bet that the private equity guys have made. They realize that, okay, there was this bust, but now a lot of these frackers have gotten tons more efficient. It costs, they've gotten their. Their cost to get a barrel of oil out of the ground has, like, fallen by a third to a half in some cases. And so they've gotten better at it. They're able to make money at lower prices, and they can kind of inch up and make money. They can kind of inch up and move with the market. And so they are now putting money into these companies and they're sustaining them through this down cycle. The private equity guys are saying, okay, you don't have to make money right now because long term, we know you're going to be a good bet. We're not going to deal with these crazy booms and busts because you can kind of move with the market.

[Anna Shymansky]

I think it's important to remember a few things. One, as a number of these companies that went through bankruptcy then were coming out of bankruptcy, some of these restructurings involved, like, debt for equity swaps. So you now are probably going to have private equity firms more involved in the kind of day to day operations of how these essentially kind of like wildcat operations are working. And there's a question of moving forward, what that is going to mean about how much they can spend on investment.

[Jordan Weissman]

Well, yes, I mean so, so right now it looks like they're investing a lot. All of these companies have negative free cash flow so they're all losing money and they are still perfectly happy to fund that.

[Anna Shymansky]

But essentially what ended up happening was you did have a bit of a culling where right now you have the leanest, strongest companies are the ones that have been able to either survive or come out of bankruptcy. So the idea is these are potentially much more profitable companies now. They don't have as much debt, their interest payments are less, the break even price has declined. Now that's a little more complicated than it looks on paper because part of the reason it's declined has been because of oil prices being really low. And so it's a bit more complicated than that. And I can also get into some other issues but the reality is it does appear that these companies are more apt to be profitable more quickly. So this isn't a stupid play by private equity. Yeah, I'm granted I used to work.

[Jordan Weissman]

In private equity, so, so the question I have is explain to me, you know, if I lent a bunch of money to an oil fracker and then woke up one morning after a debt for equity swap owning the company, I'm like, okay, now I own an oil fracker. I have two choices. I can keep on pumping money and pumping oil or I can just let it sit there for a while and not lose money and not pump oil and wait however many years it takes to wait for the oil price to come back up and then start making minting money.

[Anna Shymansky]

No, no. I mean I do think that expectations of really, really ramping up production I don't quite buy because I think that would involve more capex spending than they're willing to do at this point. But I don't think they're just going to sit there and wait because at this point, because break even prices have declined, they can still make money at this price, especially if we start to keep oil prices above 50 near 15. Especially, especially if we got towards 60.

[Felix Salmon]

Yeah, and so we should say what a break even price is just for people. So yeah, so it's just basically how, what the price of oil has to be for you to make money on it and it's just a term of art. But that's what we're talking about there. And that is what's happened. They've gotten technologically more advanced.

[Anna Shymansky]

Well, and it's not just part of it's technologically advanced. Part of it's also how they calculate it because there's this thing called high grading where you write off your most inefficient wells and you calculate only based on your most efficient wells. So some of that has been going on as well.

[Jordan Weissman]

And also they have less debt.

[Anna Shymansky]

Right.

[Felix Salmon]

We should probably come back to how this is, because I realize we lost our news hook here.

[Jordan Weissman]

What does this have to do with Donald Trump in Saudi Arabia?

[Felix Salmon]

So what this means, Right? So essentially you had all these private equity guys jump into the market, and now they effectively own a lot what used to be sort of crazy independent operations. And they've learned how. They've sort of. They've made the. They've gotten the industry to function a little bit more stably in the United States. And these Frackers aren't disappearing. They're not going away like Saudi Arabia thought. So back in November, Saudi Arabia got together with Russia, essentially, and they said, we can't kill off the Frackers. It's not working. So instead, we need to reduce our own production in order to drain off the kind of oversupply that's in the world market. If we ever want to get prices back up for ourselves, we have to take this hit right now. And this was something Russia just doesn't typically do. And Saudi Arabia had to kind of, you know, it was this grand accord. They got them to agree. And so OPEC and Russia said, okay, we're going to cut production and we'll come back and talk about this in May once we've drained off all these supplies. Except what happened. The Frackers amped up their own production, and so it's taking longer to do that. And so what we're seeing is how quickly the US Market can respond and how it's left. Left OPEC sort of not powerless, but it just doesn't have the ability to kind of tweak things the way it used to. Yeah, opec.

[Anna Shymansky]

It wasn't that OPEC thought that the Frackers were going to go out of business and never come back. They thought that they would be able to kind of tamp that down again while they focused on market share. They thought that the Frackers wouldn't have as easy time getting access to affordable capital, which ended up not being the case. And now they're In a position where there's a bit of a question of why they've changed their strategy as quickly as they have. And there are a number of theories. They, I mean, they did actually change from Naimi, who'd been in there forever in terms of overseeing oil policy. Then a new person came in about whether. Now when they're talking about Ipoing Aramco, so much of that valuation is based on oil prices.

[Jordan Weissman]

Okay, so now there's a whole bunch to unpack there. But there are three things we just need to sort of keep in mind here. Number one, act one, Saudi Arabia increases production in response to the fracking threat because it thinks it's going to drive the frackers out of business. That fails. Act two, Saudi Arabia switches tactics and decreases production in reaction to the fracking threat because they reckon that's the only way they're ever going to be able to raise prices. And then now what you're talking about is Act 3, which is Saudi Arabia has a new plan which may or may not ever happen, which is maybe we shouldn't be so reliant on oil in the first place. And what we should do is sell our state oil company around on the public markets and try and diversify our economy a little bit so we're not just a petro state. And what they want to do is list Aramco on the international stock markets at a valuation of $2 trillion, which no one really believes they're going to be able to get. And so given that they're not going to be able to get that $2 trillion valuation, it's an interesting open question whether they are going to do it or not.

[Anna Shymansky]

Right, right. Because again, going back to this idea that the Saudi, the way that their government structure works depends on the ability to subsidize so much of their population. So they are facing a question of in a just new oil market, we're not just talking about trying to get through a few years of low prices. And then things come back. We're talking about a structurally different energy market because we haven't even brought in a discussion of renewables and what that could look like in 10 to 20.

[Jordan Weissman]

Years or even your renewables in the Middle east, where now solar energy in the Middle east is cheaper than oil.

[Anna Shymansky]

Right. And I think the Saudis are not stupid. This is what they do. They understand that the market has dramatically changed. They think that there's still enough global demand to absorb the shale producers production. And I think there's some argument that they're Kind of waiting for global demand to increase. And I think that's actually one interesting area where the Saudis and the private equity guys are essentially in the same boat.

[Felix Salmon]

Yeah.

[Anna Shymansky]

That they both think what ultimately is going to bring down supply is actually these growth projections that still haven't yet to pass. Everybody's banking everything on.

[Jordan Weissman]

But then there's also just the story we've been hearing for well over a decade now, which is the peak oil story, which is basically there's a finite amount of oil in the world and as that amount of oil goes down.

[Anna Shymansky]

That was really before a lot of.

[Felix Salmon]

The technology around peak oil kind of died.

[Anna Shymansky]

Shale, offshore.

[Felix Salmon]

Now it's, now it's oil getting stranded. That's more of the story. Right.

[Anna Shymansky]

And BP though still says they think that kind of global demand is going to peak around, I think 2035. And because, because of a lot of reasons, but partly because we're going to see in the developing world a lot of laws related to frankly, climate change and also just changing lifestyle patterns that people aren't going to be using the same amount of fossil fuels. They still think you're going to see demand increasing in the developing world. But there's a question, I mean, if you look at things we're getting out of India and China and how they're talking about, you know, moving forward, considering I'm not saying they're switching overnight, but partly because they also have issues with pollution, which then is separate from climate change, but it creates a public support for new forms of energy, which again just brings into question these ideas about reducing supply by this eternal increase in demand.

[Felix Salmon]

Yeah, I mean, I think the kind of big picture issue here is that you have these commodity producing countries, these oil producing countries with various levels of corruption that have all sort of based their economies on selling oil, petro states, various degrees. And first you've had the frackers come and mess up their model and now they're, there's, there's, they're politically and economically struggling and they're not quite sure what to do. And then you have, by the time they have figured out how to deal with fracking, with this technological revolution, they're going to have to figure out how to deal with the decline of oil in general. And so after one storm hits, there's another coming for them and what happens to them after that? Right.

[Anna Shymansky]

And I mean in a, you know, slightly side note, but I mean again, ultimately if a lot of petro states would be forced to diversify their economy, I think that would actually Be really good for the population and also as a society, if people are using less oil and gas, that's also, I think, ultimately good for society. But we're talking about a part of the world that economy has been so dependent on these prices for so long. And that's not a simple shift.

[Jordan Weissman]

Let's move on to something more fun here. The chief economist of the World bank is one of the most high prestige jobs in the entire economic. Possibly the most high prestige job in the entire economic profession. Everyone who's anyone has held it, from Stan Fischer to Joe Stiglitz to Larry Summers, and it is now held by Paul Romer, who is this much beloved economist who has recently, in his sort of middle age, started getting a little bit cantankerous.

[Felix Salmon]

Very cantankerous. Delightful, delightfully cantant.

[Anna Shymansky]

I don't know if he would like the word cantankerous. There are a lot of syllables.

[Felix Salmon]

I think he would like that one.

[Jordan Weissman]

Even by economist standards, especially with other economists. This is the thing that he has really started taking aim at the entire practice of economics.

[Felix Salmon]

He really has. And we should say, just for context, Paul Romer, he's already an extremely famous, like, beloved economist. But before he got this job at the World Bank, I mean, it's why.

[Anna Shymansky]

He got the job at the World.

[Felix Salmon]

Yeah, exactly. I mean, it didn't elevate him. He almost elevated the job in this case.

[Jordan Weissman]

Everyone said, oh, my God, the World bank managed to hire Paul Roman. Like, wow.

[Felix Salmon]

He's regularly talked about as a Nobel Prize contender. And essentially anytime you hear the words human capital, that's coming back to his theory of growth. I mean, he's responsible for something called. Largely responsible for something called endogenous growth theory. I won't get too deep into it, but whenever you hear about how important education and technology are to growing an economy, he sort of laid a lot of the theoretical groundwork for that. And so anyway, he's now just turned into. He's not a troll, but he's turned into. He's turned into like a scourge upon the profession, let's put. And maybe a good scourge.

[Jordan Weissman]

And he's written a few papers and I think we've talked about this in previous episodes, like taking aim at the entire practice of economics.

[Anna Shymansky]

And.

[Jordan Weissman]

And he's practicing what he preaches, or at least he seemed to be doing that when he arrived in the World Bank. He looked at. And the World bank is basically a couple of thousand PhD economists all sitting around in a whopping great building in Washington. DC doing abstruse economics and trying to work out how it.

[Anna Shymansky]

And in theory, this relates to financing infrastructure in the developing world?

[Jordan Weissman]

Well, no, I mean in theory. So this is. So this is exactly what Paul's problem was. And yeah, this goes back to this wonderful paper which was published by Stanford's Literary Lab a couple of years ago. And I would highly recommend reading this paper because it's just awesome.

[Felix Salmon]

I pulled out some choice tidbits for later.

[Jordan Weissman]

The title of the paper is Bank Speak the Language of World bank reports 1946 to 2012. And basically what they did was they just looked at World bank reports over decades and looked at how the language changed. And Paul Romer has really clearly internalized this paper and taken it very, very seriously. And even literally once upon a time. To your point, Anna, this is what the economists did, was that they tried to look at the effect of infrastructure investments on national economies and that kind of thing. And then more recently, it's becoming more and more abstruse and abstract and less related to concrete things in the world and more related to random things like good governance or something like that. And so Paul, in becoming the World bank chief economist, also wound up being the direct Boss of like 600 of these world bank economists. And he turned around to these 600 economists who he was in charge of and said, okay, enough of this abstract nothingness, which means nothing. I want you to get back to actually saying concrete things about realities on the ground, and I'm going to force you to start getting specific about things. And this did not go down well.

[Felix Salmon]

No, they basically took his job away. He's still technically the chief economist, but they took all of his management responsibilities away.

[Anna Shymansky]

And they claimed somewhat that it was because he told, told them they used and too much.

[Felix Salmon]

Yeah. So if you read this paper, you know, I was, I was kind of, you know, I was a little skeptical of Romer's militant, militant, anti, Anti. Anti conjunction position. Yeah, thank you for finishing that for me. But when you read this paper, you actually see it's sort of a serious issue because the World Bank's focus kind of goes from. It transforms at first, it's very much about fixing poverty, dealing with things like agriculture. And you see those words reflected in the language used in its reports. And then all of a sudd by the end of it. It's all about this bureaucratic ease. And essentially they become very concerned with programs and their own.

[Jordan Weissman]

Okay, so let me, let me give one, my favorite example from the paper is where they look at the words surrounding the word poverty? Yes, in papers. And then they also look at the words surrounding the word, the term poverty reduction. And the words surrounding the term poverty are things like total cost, population, income, services, problems, resources, food, health, agriculture, you know, real things which we should study. And one would expect naively that if you're talking about poverty reduction, one would get a similar set of terms. One would be wrong because the actual terms surrounding poverty reduction are strategies, programs, policies, focus, key management reports, goals, approach, projects, framework, priorities and papers.

[Felix Salmon]

Yes.

[Jordan Weissman]

So that is what Romer was.

[Felix Salmon]

It's this bizarre solipsism of the World bank where everything is focused on their own kind of procedure and the things that people who've been through the Kennedy School of government might care about, but not necessarily a farmer in Brazil.

[Anna Shymansky]

And I think it's important it's not just a semantic issue because it relates to the mission of the bank itself. And as they're focusing on theory and writing these abstruse documents, you have the Chinese infrastructure Bank actually getting involved much more in the developing world. And what does that mean?

[Jordan Weissman]

And the, and the way. And this brings us back to this question of. And yes, which is the. There was a lot of people laughing on Twitter about the fact that Paul Romer would look at the percentage of words that were the word and. And he would cap it at 4%.

[Felix Salmon]

Honestly, that may have been too high.

[Jordan Weissman]

But you're like, yeah. So I have. One of the passages that was brought up in the paper is this is why Paul Romer hates the word and is because there was this passage from the 1999 report. I mean, this is not new. This goes back 20 years where they want to quote, promote corporate governance and competition policies and reform and privatize state owned enterprises and labor market social protection reform. There is greater emphasis on quality responsiveness and partnerships, on knowledge sharing and client orientation and on poverty reduction.

[Anna Shymansky]

Do they just hate commas?

[Jordan Weissman]

It's partly that they hate comments, but it's more that what they're doing is they're concatenating a whole bunch of different things which don't belong together. As the authors of the Stanford reports say. Knowledge sharing has really nothing to do with client orientation. Poverty reduction, nothing to do with either. But if you just throw them all together into a laundry list of things like governance, which is good things, you lose the specificity, but you get to sound like you're right, you sound cool.

[Anna Shymansky]

You can publish this, you say, oh, look how clever I am. But you're not actually creating any change in the world. You're not actually helping people.

[Felix Salmon]

Have either of you ever had any experience having to write sentences like this? I'm curious because I have and I want to talk a little bit about like how it happens to somebody. So when I was reading this, and this is, this is gonna sound really mundane, but I had acid flashbacks to my days having to write like advertising copy for a law firm. And how is this related? And the reason is because you're essentially writing for. You're essentially writing by committee to some extent and you're trying to please all these different stakeholders who all have little pet things they want to insert and you don't want to offend anybody. And so you have to put everything in the vaguest possible language, which often involves some really obnoxious use of the passive voice or whatnot. And by the end you have something that you can hand to like six very well paid economists or lawyers in my case. And no one will be offended because they see their little part of it is there, but it means jack shit. And so like it seems like at some point you've just lost your. And it's a sign of having lost your mission that there's no point to what you're.

[Anna Shymansky]

I agree. And I think this also speaks to the mission creep at the World bank itself, which has been a criticism of the mission of the World bank for a number of years.

[Jordan Weissman]

Well, this is also the mission creep in the economic profession. And this is where the Paul Romer criticism of economics generally overlaps with the Stanford linguistic criticism of economics assets practiced at the bank, which is that economics has turned into itself and that it is increasingly finding it difficult to say helpful things about the real world. It has become much more macro. It is becoming much less like much more model based, many more models.

[Felix Salmon]

I disagree with that a little bit because I think what so. So Paul Romer's criticism of economics is a criticism specifically of macro. His criticism is of basically this turn that happened in the 1970s and not necessarily even the turn it took them, but how it was interpreted by people who came afterwards. And it's about the assumptions that. The kind of crazy assumptions that go into these models that tell you that monetary policy doesn't matter in the end. Like that's his. What he's upset with. Macro economics in general has actually become a lot more empirical over that same time. And so that's sort of the contrast.

[Anna Shymansky]

I think, and it's a big criticism of Romer, is that some of his criticisms sometimes appear to be against a form of economics that isn't the type that is actually practiced by a lot of economists now.

[Jordan Weissman]

But the fact is that the thing with the common thread here is that he is in favor of grounded specificity and against unfalsifiable hand waving.

[Felix Salmon]

Yes, that's true.

[Jordan Weissman]

So he comes in with this crusade, he's like, no unfalsifiable hand waving and he gets ousted. Like the unfalsifiable hand waivers basically win this battle.

[Anna Shymansky]

Yeah, it again is where the bureaucrats have their day.

[Jordan Weissman]

And this is despite the fact that the, the head of the World Bank, Jim Kim, is also famously trying to shake up and do a lot of like management changes and get the people out into the field and doing more real things. And he seems to be safer in his job. It's weird that like Jim Kim seems to be safer in his job than Paul Romer.

[Felix Salmon]

You know, this could also just be, you know, a matter of style. Right. And not just grammatical style, but like, you know, if you.

[Anna Shymansky]

Leadership style.

[Felix Salmon]

Yeah, leadership style. Like he may have had the right idea and just pissed off enough people so quickly that it wasn't sustainable. I mean, I do think it's a little bit unfortunate that bureaucrats seem to have won at a point where the World Bank's relevance is suddenly coming into question. Or not suddenly has been coming into question for a long time, but even more so now. Like you were saying with China, sort of trying to take on this mantle. But yeah, I mean, he may have had the right idea and been the wrong guy.

[Jordan Weissman]

Okay, numbers round. So Jordan Weissman not only came into the studio today with his laptop, as is his one, but also has a literal physical copy of the New Yorker.

[Felix Salmon]

I'm an ink stained wretch today because the New Yorker ink still wipes off on your hands. Yeah. So I guess it's time for my number then, right? My number is 38,000. That's essentially how much sand 1 mile of American interstate highway requires to produce 38,000 tons of sand. And why am I bringing this?

[Jordan Weissman]

Are we reaching peak sand?

[Felix Salmon]

Basically there's a New Yorker article about how like we are using more sand than really is sustainable, like worldwide. And it's partly because of the vast amounts of it that go into things like concrete glass. Our world is built on sand and it's so metaphorically apt. And we're running out of the sand and it's all going to crumble anyway. That's all I have to say.

[Anna Shymansky]

And actually that's, that's fitting with my number because part of where what was using all of that sand has. Was. Has been the Chinese government in terms.

[Jordan Weissman]

Of building one day. One day Anna's gonna have a number which is not Chinese. But that day is not. Not today.

[Felix Salmon]

I don't think. I don't think you ever should know.

[Anna Shymansky]

It is not. So My number is 164%, and that's the corporate debt to GDP ratio in China. So this past week, Moody's downgraded China for the first time, I think, since 1989. So even though they're still far in investment grade territory, this is significant in terms of Moody's pointing out that we should be paying attention to.

[Jordan Weissman]

Okay, so let's just. Let's just be clear about this number. If you add up all of the corporate debt in China and all of.

[Anna Shymansky]

The household and all of the quasi, then you actually get over 300, not over almost 300%.

[Jordan Weissman]

But if you add up all of the corporate debt in China, it comes to 164% of GDP.

[Anna Shymansky]

Yes.

[Jordan Weissman]

And that is so high partly because all of the banks are state owned, or many of the banks are state owned, that that actually affects China's sovereign credit.

[Anna Shymansky]

Well, yes, of course, because a lot of these are contingent liabilities. Because the idea is that if a state owned enterprise can't pay its debt, the government is then going to pay the debt.

[Jordan Weissman]

And my number, just to finish this off, is 16% or 0.16, I guess, Foursquare, you know that little game which you play on your phone where you check in places, it turns out still there, it still exists. And they have 132 million users or something enormous, and they are on many phones and they can see how many people are traveling around the world. And they know when you're traveling around the world, and they can look at where you're traveling to. And depending on whether you're going to amusement, amusement parks or to convention centers, they can make a pretty good guess as to whether you're a leisure traveler or a business traveler. And so what they did was they looked at all of the non American users of Foursquare and tried to say, well, how. But how many of those people are traveling to America for leisure, not for business? How many? Basically, this is a way of measuring international tourism to America. And what they found is that in March, the amount of international tourism to America is 16% lower than it was a year previously.

[Felix Salmon]

Why might that be?

[Jordan Weissman]

And we will get the official numbers about, you know, tourism entries into America in about six months. But this is the first very early indication that there's been a massive, massive effect on international tourism into America in 2017.

[Anna Shymansky]

And who knows why that could be? Maybe because of someone who's not currently in America, who shall not be named.

[Felix Salmon]

Maybe he'll be detained at the border. Yes, we could only pray.

[Jordan Weissman]

On which Trumpish note we shall bring this episode of Slate Money to an end. Do listen to all the other shows on Panoply at Panoply fm. Many thanks to Dan Schrader and to the other producer types around these parts, such as Steve Lichti and Andy Bowers and June Thomas. Write to us. Our email address is always slatemoney.com leave us a review over at Apple Podcasts and we will talk to you next week on Sleep Money.

[Felix Salmon]

And that's an additive.

[Jordan Weissman]

Like this and that, but that's sort of the opposite.

[Felix Salmon]

Not this, but that.

[Jordan Weissman]

And then there's or when you have a choice like this or that.