The Finance vs Business Edition

Summary

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Slate Money

Episode: The Finance vs Business Edition

Date: May 21, 2016
Host: Felix Salmon
Guests: Rana Foroohar (author, economic analyst), Kathy O'Neill (blogger, data scientist, author)

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Episode Overview

The “Finance vs Business” edition explores how the world of finance has increasingly dominated traditional business—moving from a supporting role to becoming the main game in the global economy. Anchored by special guest Rana Foroohar, author of Makers and Takers: The Rise of Finance and the Fall of American Business, the episode dissects core arguments in her book, discussing the evolution of financialization, its impact on innovation, labor, and economic growth, and the consequences of this seismic shift for companies, consumers, and society at large.

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Key Discussion Points & Insights

1. Makers vs Takers: Reframing the Debate

[02:00]–[04:05]

• Main Thesis: Foroohar’s central argument is that finance, once a catalyst for business, has become self-serving. “Market capitalism is broken, that the financial markets are no longer supporting business and it's a big problem.” – Rana Foroohar [03:13]
• The “makers vs takers” terminology is reclaimed from political discourse, moving away from Paul Ryan/Mitt Romney's use. Foroohar reframes it: "The financial sector as a whole creates 4% of jobs in this country, but it takes between 25 and 30% of all the corporate profits in the country." [18:46–19:07]

2. How Finance Overtook Business—The GM Case Study

[04:35]–[05:56]

• GM (General Motors) exemplifies the shift: company leadership moved from car engineers to MBA “bean counters,” resulting in siloed operations and issues like the ignition switch crisis.
• “The CFO's office and the sort of MBAs were running everything rather than the engineers… the root cause of that was that the money guys had taken over business.” – Rana Foroohar [05:01]

3. Financialization: The Core Data

[06:31]–[07:39]

• Only about 15% of money flowing through the US financial system goes towards actual investment in new businesses; the rest is channeled into existing assets (stocks, bonds, real estate).
• “15% of that money is going into business investment... the rest... buying and selling of existing assets.” – Rana Foroohar [06:47]

4. Business Schools & Industry Knowledge Lost

[08:16]–[10:35]

• Business schools used to be more industry-specific, now focus predominantly on finance and efficiency models.
• This shift also affected banking: local lending knowledge was replaced by finance-driven algorithms, making loans less personalized and risk assessments weaker.

5. Negative Consequences of Financialization

[11:22]–[12:56]

• Companies became more volatile and risk-prone as they relied more on financial activities.
• Hedging and speculative financial strategies sometimes undermine core business stability, e.g., airlines playing the oil markets “at exactly the wrong time.”– Felix Salmon [12:31–12:45]
• The effects extend beyond companies into increased consumer debt and broader economic instability.

6. The Case For and Against Financialization in Tech (Apple, Uber, Tesla)

[13:33]–[15:21]

• While aggressive finance powers the growth of firms like Tesla or Uber, it also leads to questionable practices, e.g., Apple borrowing to fund stock buybacks while sitting on offshore cash, thus reducing innovation and fostering artificial volatility.
• “Apple… has spent a lot of money issuing debt… which makes investors like Carl Icahn very happy… share price would get jacked up artificially.” – Rana Foroohar [13:49–14:45]

7. Stock Buybacks: Good or Bad?

[15:21]–[26:18]

• The panel questions if stock buybacks are responsible corporate behavior, or just financial engineering that boosts share prices without real economic benefit.
• Apple’s use of debt to fund buybacks while hoarding profits offshore is presented as tax avoidance more than business investment:
  “They're not actually buying back stocks with their profit… they’re leaving their profit offshore... it is entirely a way to avert taxes.” – Kathy O'Neill [25:28]

8. Who Benefits from Financialization? (And Who Loses)

[19:07]–[19:44]

• Profits in finance do not map to social good; scale has made finance more—not less—expensive, counter to traditional economies of scale.
• “Everything else in the world gets cheaper as you get more of it. Except for finance, it gets more expensive.” – Felix Salmon [19:44]

9. Pharmaceuticals: Financialization vs. Innovation

[20:38]–[24:06]

• Pharma industry’s pivot to mergers, buybacks, and portfolio strategies over R&D is a cautionary tale: “Morgan Stanley report in 2010 [said] pharma… should just give up R&D altogether and just essentially do financialized investing.” – Rana Foroohar [21:09]
• Debate over whether basic innovation can be left to VC-backed biotechs, with big pharma acting as aggregators rather than innovators.

10. Wider Economic Impact: Are We Sacrificing Growth?

[30:07]–[31:04]

• “After [finance] gets too big, it is a headwind to GDP growth. And it actually that that effect kicks in when finance is half the size of what it is in the US.” – Rana Foroohar [30:43]
• Excessive financialization is linked to wage stagnation, increased consumer debt, and overall weaker growth.

11. Housing: Private Equity’s Infiltration Post-Crisis

[34:46]–[42:16]

• Big investment firms (e.g., Blackstone) became the largest single-family landlords in the US after the housing crisis, exploiting regulatory gaps to buy up distressed properties for rental.
• “There were no provisions saying you had to keep a certain percentage… affordable… in a lot of neighborhoods, you have unemployment rates that are higher than the national average, but rents that are also higher than the average.” – Rana Foroohar [39:27]
• The absence of local, responsible ownership—traditional in housing—undermines community and increases inequality.

12. Policy Fixes & Systemic Incentives

[42:16]–[44:37]

• The group debates abolishing the mortgage interest tax deduction to reduce market distortion:
  “We really should abolish them." – Rana Foroohar [44:25]
• Further, regulations ought to focus on changing the incentives that currently make "financialization" the logical (if damaging) path for companies.

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Notable Quotes & Memorable Moments

• “Business is now in service in large part to the capital markets rather than the other way around.” – Rana Foroohar [04:05]
• “Only 15% of money that's floating around and going through the financial system is actually going towards investment.” – Kathy O'Neill [06:31]
• “Debt is the lifeblood of finance… and the tax code in the US actually really supports this in ways that I think are very unhealthy.” – Rana Foroohar [07:49]
• “The financial sector as a whole... creates 4% of jobs... but it takes between 25 and 30% of all the corporate profits.” – Rana Foroohar [18:46]
• “Finance, as it gets bigger, gets more expensive; there are no economies of scale...” – Rana Foroohar [19:32]
• “The model is about incentivizing broad, deep economic growth at a time when, whatever you want to call the 2% economy, secular stagnation—Is this model actually creating underlying growth?” – Rana Foroohar [29:16]
• “You get companies that can [achieve] the same market share as the corporate giants of the past, but create fewer jobs.” – Rana Foroohar [27:58]

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Timestamps for Important Segments

• Main thesis and episode’s central contradiction: [03:01–04:35]
• GM and the ‘Bean Counter’ takeover: [04:35–05:56]
• Only 15% of financial flows go to real investment: [06:31–07:39]
• Business schools and decline of local expertise: [08:16–10:35]
• The rise of consumer debt and financialization’s costs: [11:22–13:33]
• Apple, stock buybacks, and cash hoarding: [13:33–15:21], [25:28–26:18]
• “Makers vs Takers” terminology and profit distribution: [17:31–19:07]
• Pharma and financialization: [20:38–24:06]
• Housing policy and private equity buyout consequences: [34:46–44:06]
• Call for ending mortgage interest deduction: [44:06–44:37]

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Numbers Round

[46:22–48:47]

• Venezuela’s infant mortality up 100x since 2012: [46:22] (Kathy O’Neill)
• 671,000 papers on SSRN, now acquired by Elsevier: [46:49] (Felix Salmon)
• $4 of debt for every $1 growth in China: [47:40] (Rana Foroohar)

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Tone & Style

The tone is sharp, inquisitive, and occasionally playful, with Felix Salmon’s dry wit and Rana’s passionate advocacy for economic change punctuated by Kathy’s grounded, critical questioning. The banter is lively, yet the analysis remains rigorous—a trademark for Slate Money’s approachable but deeply informed economic scrutiny.

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Summary

“Finance vs Business” frames the rise of financialization as an existential challenge to capitalism’s original promise and social contract. Through incisive examples—from GM to Apple, pharma to private equity in housing—Rana Foroohar argues that finance’s dominance undermines real innovation, exacerbates inequality, and ultimately endangers long-term growth. The debate moves beyond finger-pointing at corporate actors, urging a reimagining of economic rules and incentives that reward genuine, productive enterprise—true “makers” over “takers”—for a more balanced and sustainable prosperity.

Transcript

[Rana Foroohar]

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[Felix Salmon]

Hello and welcome to the Finance vs Business edition of Stuff. Slate Money, your guide to the entire global economy and or the news of the week. This week our episode is titled by our special guest because not only do we have the one and only Kathy o', Neill, the blogger and data scientist.

[Kathy O'Neill]

Hi.

[Felix Salmon]

Hi, Kathy. But standing in for Jordan Weissman is someone of much greater stature. The one and only.

[Rana Foroohar]

Not at all.

[Felix Salmon]

Rana Farooha, who's here to. I don't know, just be amazing. You have, you have a book and you kind of have a podcast or it comes out. You have a thing on the radio.

[Rana Foroohar]

I have a thing on the radio. I do a show regularly called Money Talking on WNYC. I'm CNN's global economic analyst. If that's a weighty enough title for.

[Felix Salmon]

You, that sounds very impressive.

[Rana Foroohar]

It is impressive.

[Felix Salmon]

Are you also a young global leader?

[Rana Foroohar]

Not yet. I think I've written too many negative pieces about the wef and I am Time magazine's columnist. Most importantly.

[Felix Salmon]

Most importantly. So. So Rana has this book called Makers.

[Rana Foroohar]

And the Rise of Finance and the.

[Felix Salmon]

Fall of American Business, which is a quite impressively. What's the word? Dyspeptic book. Given. Given your. Your status, that's a $4 word. Time magazine, which is like the. The icon of centrism and never really having much in the way of contentious opinions. You have a lot of contentious opinions.

[Kathy O'Neill]

Throw in that another title you can give yourself as occupier. I mean, the stuff you were saying, I was like, we talk about this.

[Rana Foroohar]

Every week, you know, and I would actually, I would combat Felix's idea about tying because since I took over economics there, we've been out of the box for some time. So.

[Felix Salmon]

Yeah, it's true. It's true. The mellifluous days of Justin Fox are long gone.

[Rana Foroohar]

Ooh, okay. Not gonna touch that.

[Felix Salmon]

No, I love Justin. He's awesome. But he was never a bomb thrower.

[Rana Foroohar]

Well, time is, you know, time actually has an interesting position in the media landscape because we tend to be a top of the market indicator, actually. And the fact that I was able to get my book cover on the COVID you know, as an excerpt, I think really says something about the political tipping point we're at, the economic tipping point we're at. I mean, my thesis is basically that market capitalism is broken, that the financial markets are no longer supporting business and it's a big problem. So yeah, it's a, you know, it's a, it's a pretty tough statement.

[Felix Salmon]

So we're going to, we're going to delve a little bit into a few different aspects of this thesis. I mean we honestly could spend weeks just talking about this book. There's a huge amount of material in there. But let's start with the sort of 30,000 foot view. And now, why, what is the name of this episode of the podcast? Remind me again, since you named it Finance versus Business. Okay, now what's the contradiction there? Isn't finance something that all businesses need in order to be able to thrive?

[Rana Foroohar]

Well, finance started out as something that was supposed to be a catalyst to business. If you think about market capitalism as envisioned by Adam Smith, it's finance helping invest everybody's savings into new enterprises. But I would argue that since basically the early 1970s, that role has been changing now and finance has become the game. It's sort of, you know, the tail wagging the dog. And business is now in service in large part to the capital markets rather than the other way around.

[Kathy O'Neill]

You spent a lot of time talking about GM and how GM was taken over from, from the car guys to the business guys in the finance with a finance perspective. Can you talk a little bit about that?

[Rana Foroohar]

Yeah, no, totally, because one of the key sources on this book is a guy named Bob Lutz who was the vice chairman of GM for a long time. And he wrote a book a few years called Car Guys versus Bean Counters. And it was really about the cult of the NBA within the auto industry and how that came to be. And he just, there was a little snippet about Robert McNamara who was of course, you know, the engineer of the Vietnam failed efforts in the U.S. in the Vietnam War. And also ran Ford for a time and brought this whole idea of hyper focus on very kind of siloed metrics to the entire auto industry and then later to many blue chip US companies because a lot of his alums from Ford actually spread out, out into US industry. And, you know, Lutz thought, and I came to feel, as I reported on gm, that this was one of the big reasons for their ignition switch crisis a couple of years ago, because, you know, they had these divisions that were not talking to one another. And the root cause of that was that the CFO, the CFO's office and the sort of MBAs were running everything rather than the engineers. And it was just this diametric change. And I began to think about that in a larger context of how the money guys had taken over business.

[Felix Salmon]

And of course, it's not just General Motors, it's also General Electric, which was officially a too big to fail bank during the financial crisis. I mean, GM had gmac, which was a financial arm which more or less outgrew the sort of car bit. This is something which we've seen quite a lot, is that you can make more money with money than you can by making stuff that if you look at the, you know, the rich lists, there's a lot of hedge fund managers and bankers and financiers as opposed to actual, what you call makers.

[Rana Foroohar]

Yeah.

[Kathy O'Neill]

And you even have like that really startling statistic that only 15% of money that's floating around and going through the financial system is actually going towards investment.

[Rana Foroohar]

Yeah, no, it's an amazing stat. It comes out.

[Felix Salmon]

What's the time series on that? Is that much lower than it used to be or has it always been low?

[Rana Foroohar]

It's much lower. It's gone down. It's halved really since the 1970s and it was. But it's been going down since the post war era. And this is really deep academic research. And just to break that number down a little bit, so 15% of all the money flowing out of US financial institutions and actually many other countries, this is not a, you know, story that's unique to the us. In fact, the UK is in some ways more financialized. As you know, Felix, 15% of that money is going into business investment. So where's the rest of it going? It's going into the buying and selling of existing assets. So stocks, bonds, houses. You can argue maybe that the mortgage business is productive in some ways. People buy homes and then they buy stuff, but it's less productive statistically than investing in new businesses, growing new enterprises.

[Felix Salmon]

And just to be clear, when I rack up a bunch of stupid debt on my credit card, is that part of the 15%? Is that part of the 85%?

[Rana Foroohar]

Yeah, that's kind of the 85% actually. That's another thing that's bad that I cover in my book. I have a whole chapter, in fact on debt. Debt and how, you know, debt. The reason that we have grown debt so exponentially, not just in the U.S. but elsewhere, is that debt is the lifeblood of finance. You know, it is where finance makes its money, issuing debt increasingly. And the tax code in the US actually really supports this in ways that I think are very unhealthy.

[Kathy O'Neill]

Before we go all the way over there, I want to bring us back to sort of this finance taking over business concept. And I think you make a really interesting case about the way business schools themselves have evolved and what business school used to be and what it is now which are training those. Those number, those bean counters, as it were, in the gm. Can you talk a little bit about what business school used to be?

[Rana Foroohar]

Yeah, well, so business school used to be much more like what you would find in a kind of a Germanic model. It was sort of trade school for corporate leaders. So if you were going to work in the packaged goods industry or in the manufacturing industry, you would probably go to a business school in an area of the country where that industry was located that was focused on particular industry. Finance was kind of secondary, as it was in the economy. But this is another thing I got actually from Bob Lutz, who told me he went to business school before he knew better. Kind of like sailors get tattoos, which really struck me. Business schools, in part because of McNamara, who ran Harvard Business School, began really putting finance at the center of things. And so now Finance 101 is really the core curriculum for MBA students. And by the way, Finance 101 and Econ 101 is still very much efficient markets theory. Right. But you know.

[Felix Salmon]

And the weird thing is that this applies even to bankers. That in the sort of platonic ideal of how banking works, is that you're. You have a branch manager of a bank in Kansas and the branch manager of the bank in Kansas makes loans to local businesses and actually understands the agriculture in the agricultural industry really well and knows a lot about wheat and doesn't really know anything about finance because he doesn't need to know very much about finance. What he needs to know is about wheat and farming and whether these loans to farmers are going to get paid back. And what's happened in finance as well as just the real economy is that all of those little local pockets of industry knowledge in the banking sector have been replaced by some incomprehensible algorithm and bankers basically only know about finance anymore. And that makes it much harder to get those sort of idiosyncratic loans.

[Rana Foroohar]

True enough. And in fact, you know, this kind of has just to walk out for a minute on history. This has some pretty deep roots. It goes back to the split between Hamilton and Jefferson about the banking structure in the US and what it should be. And if Hamilton, of course, wanted it to be big and national and unified, and Jefferson, who was sort of representing the small agrarian farmers of the south, wanted it to be very local. And interestingly, what we ended up with is a bit of a hash up, a mix of the two. So you got a national system where investment banking, commercial banking, banking was combined, but there were laws that prevented regional commercial banks from merging for a long time. So you didn't have these kind of local, it's a wonderful life type bankers that could then grow and spread risk nationally the way you do in the Canadian system, for example, which is, I think, much more secure because of that.

[Kathy O'Neill]

So one of the things that you already mentioned is like a negative consequence of business being taken over by finance is the GM ignition problem. And we also talked about like loans to small businesses being less thoughtful. What are the other negative consequences of this?

[Rana Foroohar]

Well, you know, just going back to what Felix was saying about GE being a too big to fail bank until recently. You know, the more financialized a company becomes, I think the more volatile its share price is, the more risk it has. Just to give you a sense statistically, and then I'll give you a couple color examples. Since the 1980s onwards, American industry has gotten five times as much revenue from financial activities as it did in the early 1980s. So huge increase there. And this is everything from the sort of, you know, credit servicing to customers that certain companies might do to tax optimization to hedging. I mean, hedging, for example, is an interesting thing because energy companies, transport companies, you can argue that they need to hedge the price of oil, but there's plenty of airlines that have gotten deeply, deeply into this business and then they're not so good at it.

[Felix Salmon]

There's been all of these headlines as the price of oil has plunged to these crazy historic lows. I've been seeing all of these headlines about how the airlines are taking off their oil hedges, which just seems to be insane, right?

[Rana Foroohar]

It's exactly like playing at exactly the wrong time in the market. But the bottom line is that they undermine their own business model by creating more volatility in the commodities markets by getting into this game.

[Felix Salmon]

So let me ask you, because I don't want this to just be a sort of fulsome and effulgent phrase of your book because that would be not. Let me, let me ask you, is there not a case for financialization? Is there not a case that say an aggressive and ambitious company like Tesla or Uber can get billions of dollars of investment from the finance world and use those billions of dollars to really kind of change the planet in a way that might not have been possible from your local bank.

[Rana Foroohar]

For sure. But then, you know, it's interesting that you bring up Uber as an example because that, that, that gets into a whole nother paradigm of what financialization has done to the tech industry. And I think in recent years you could argue that it's really taken a lot of big tech companies kind of away from what we think of as the Silicon Valley model of really innovating, spending a lot of time on technology. I don't want to get so much into Uber because I think that that's kind of another story. But let me talk about Apple for just a minute because that I think is a very interesting story of a company that quite financialized. So I would argue some people might argue differently. But I would say that I don't think there's been a real game changing technology from Apple since Steve jobs died in 2011. And the share price has been wobbly over that time. I mean it's definitely sunk at various points. And so the company has spent a lot of money issuing debt at very low rates, which of course we have because of the financial crisis to pay back money and buy back stock. Which makes investors like Carl Icahn very happy. Until quite recently he was tweeting about every two seconds that they should do more buybacks. Stock price would get jacked up artificially because of course that's what share buybacks do. But then the minute that there was bad news, real bad news, a decision taken by the Chinese which would affect the market share potentially in the Chinese market, icon dumps the stock. I mean Buffett came in and bought it. But the whole point is that this creates a very volatile game that these companies play. By the way, there's another kind of Kafka esque element to all this, which is that Apple of course is more involved in the capital markets at a time when it doesn't need any capital. You know, it's got $200 billion in money sitting overseas and much of it in offshore accounts. Now of course it doesn't want to bring that money back and pay the US tax rate. And you can make an argument that's a Very smart thing to do. But it just shows you how Kafkaesque the market system has been.

[Felix Salmon]

So that is the perfect segue to the next segment where I want to really talk to you about this question of stock buybacks and whether they're good or bad, whether Apple spending billions of dollars buying, whether it's bank bracket stock is bad for Apple, whether it means that there's a sort of opportunity cost, which is the implication not only of that particular example, but kind of if your entire book, if it was doing less of that, then it would be doing more of the other. But before we go into this whole question of stock buybacks, I need to thank the sponsor of Slate Money this week, which is Harry's Razors, which are this wonderful combination of American and Germanic in a weird way.

[Rana Foroohar]

A maker.

[Felix Salmon]

They're a maker. They make razors in Germany in.

[Rana Foroohar]

Oh my God, love that.

[Felix Salmon]

Which they bought with $100 million, which they raised in venture capital in America.

[Rana Foroohar]

Fabulous.

[Felix Salmon]

You see, so it's a nice little combination.

[Rana Foroohar]

You know how I feel about the Germans.

[Felix Salmon]

They took their money, they invested it into a real factory, and now they make these razors which have five blades and they shave you super smooth.

[Rana Foroohar]

So German. Love it.

[Felix Salmon]

It's great. And you can get a great sh. You can get a whole starter kit if you go to Harry's.com h a r r y s dot com for ten bucks, which is kind of amazing. You get the razors and you get the little non slip handle and the shave cream and three of those amazing. Like five.

[Rana Foroohar]

Buy my husband one.

[Felix Salmon]

Buy your husband one. And it's all of ten bucks because it's a $15 kit minus $5 off the first purchase, which you get with the promo code money. So you go to Harry's.com, put the promo code money in, and then when you love it, you can just set up a subscription thing and they just arrive automatically. And it's so much cheaper than if you go to the drugstore and buy like the brand razors.

[Rana Foroohar]

Clever sigh of satisfaction.

[Felix Salmon]

Financialization at work.

[Rana Foroohar]

Makers.

[Felix Salmon]

Makers. So, okay, so back to this question of Apple.

[Kathy O'Neill]

Actually, before we go into Apple, can we talk a little bit about makers and takers? Because I found it pretty fascinating how you redefined those terms away from the Romney version.

[Rana Foroohar]

Well, I was so. And you know, it was actually Paul Ryan that first used those terms and Romney popularized it for sure, but Ryan first used those terms in the 2012 election cycle, you know, to refer to the 47% of Americans that were not paying any income tax. And apparently the capitalists that were doing all the good things and that we should be so happy about. And I just found it really, really offensive. I mean, you know, I'll come clean here and say I grew up in the Rust Belt. I grew up in a tiny town in rural Indiana. My dad is an electrical engineer, he's an immigrant, he ran and runs a small manufacturing business. So I have a little prejudice towards makers, you know, but I just found that so wrong headed because if you look over the last 20 years, trickle down theory, which is basically what that version of makers and takers is playing off of, just hasn't worked, right? I mean, you know, we do not have a system in which the owners of capital are actually producing greater prosperity for the whole right now. And we just need to look more carefully at why that is. And so I wanted to flip those terms and you know, I was really galvanized. One of the key statistics in my book is that the financial sector as a whole, so not just banks, but insurance, mutual funds, you know, kind of the larger finance industry creates 4% of jobs in this country, but it takes between 25 and 30% of all the corporate profits in the country. So that number to me is like the oxygen being sucked out of the room.

[Felix Salmon]

The thing which strikes me about that statistic is that if the finance industry was efficient.

[Rana Foroohar]

Yeah, right, exactly.

[Felix Salmon]

Then it would be a tiny sliver. Then all of those profits would be competed away and they would do their intermediation at incredibly low cost and they would have low cost, hyper efficient capital allocation services which made very little money.

[Rana Foroohar]

You've just hit the nail on the head because over the last 40 years, as Finance has gotten bigger, it's also gotten more expensive. It's, it's just the exact opposite of what's supposed to happen. There are no economies of scale here.

[Felix Salmon]

Everything else in the world gets cheaper as you get more of it. Except for finance, it gets more expensive. So let's, but let's come back to this question of Apple and stock buy buybacks because Apple is this hugely successful company now, you're right, it hasn't innovated very much in the past few years. Although there's no particular reason to believe in my mind that, you know, past performance is a great indicator of future innovation. The question is what is it meant to do with all of these billions of dollars of profit that it's earning? You know, we've seen in the pharmaceutical industry over and over again that just because you're Making billions of dollars doesn't mean you can just magically create innovation out of thin air. And we've seen with Apple that even when you're not making billions of dollars, you can be incredibly innovative. There doesn't seem to be any correlation whatsoever between innovation and profits. So what are they meant to do with the profits if not return it to the shareholders?

[Rana Foroohar]

Okay, so I want to come to that question, but first I want to hit something on pharmaceuticals because actually I have a whole chapter in my book about the pharmaceutical industry, which is the most financialized of any industry. And in fact, there was this really famous Morgan Stanley report in 2010 that argued that the pharmaceutical industry, which, like, is responsible for coming up with drugs to make us healthier and save lives, should just give up R and D altogether and just essentially do financialized investing, do mergers that would kick up the share price, do buybacks.

[Kathy O'Neill]

And that's what Valeant did.

[Rana Foroohar]

Right? I mean, kind of.

[Felix Salmon]

I'm kind of sympathetic to this because. Because the pharmaceutical industry, if you look at history, is really bad at R and D. R and D. It's much better to allow the small little biotech industries to do the R and D and then when they manage to come up with some wonderful drug, then you acquire that biotech company for some vast amount of money and then you have a new drug that's a much more efficient form of R and D than just spending a whole. About a whole bunch of money, which we've seen over and over and again from pharmaceutical companies not only in the US but also in the UK and also in Switzerland. It just doesn't turn into innovation.

[Kathy O'Neill]

I'm not a lab scientist, but I'm assuming that there are certain projects you simply can't do in that. With that model.

[Rana Foroohar]

Right.

[Kathy O'Neill]

I mean, if you have real money, you can do a bigger kind of experiment.

[Rana Foroohar]

Well, it's interesting, Felix, actually you have a point in the sense that there is a model. And actually Andrew Lowe at mit, who is a financial professor is, Is sort of doing some work around coming up with this for the NIH to essentially create.

[Felix Salmon]

To create, Sorry, like the prize model.

[Rana Foroohar]

I don't know about the prize model.

[Felix Salmon]

But he's back up. Let's go back to Angela.

[Rana Foroohar]

Yeah, yeah, sorry. So, but the point is that, yeah, a big pharma company could act in a way like a vc, right, Picking from amongst these biotech companies, but right now they're acting like giant portfolio companies. That model is much less profitable and stable, I would argue over the long haul than actually the model you're talking about, but it's a different model. I mean, you could, you could bring that power and that money to funding real innovation, but right now you're just, you know, these pharma companies look like portfolio management companies where nothing connects to each other.

[Felix Salmon]

And I'm saying. Well, to be clear, I'm saying that they don't need to fund the innovation, that you can fund the innovation in the equity capital markets and the venture capital markets where you get a bunch of venture capital.

[Rana Foroohar]

It's been going down.

[Felix Salmon]

The biotechnology sector. And then if, if one of those biotechnology companies winds up with a blockbuster drug, that company becomes incredibly valuable and inevitably winds up being bought by Sanofi or someone, someone like that.

[Kathy O'Neill]

Can I make it. I'm sorry, just like this, this model, which I haven't, we haven't discussed this before, but like, imagine you do that with, you know, research writ large.

[Felix Salmon]

I'm not saying you do this with.

[Kathy O'Neill]

I'm just saying.

[Felix Salmon]

But if you did that, I'm just saying you can't. Historically speaking, if you look at the pharmacy, the big pharmaceutical companies, they're not very good at basic research. That generally happens in the academy. And they're not very good at inventing drugs. And if you can take that money and instead take it out of the big pharmaceutical companies which are bad at creating drugs, and give it to a whole bunch of little baby companies which are much more incentivized to create drugs, I'm not convinced that's not a good thing.

[Rana Foroohar]

Well, I'm not sure that that actually. And this is kind of another whole podcast about the nature of what's needed in drug development innovation. I'm not sure that that actually tackles the problems of today. That would require lots of desiloing across different areas of research because you would have lots of independent projects operating separately. But you're hitting on another point that actually I would love to mention, which is that a lot of basic research was done by the US government. And this actually connects to what, what your question about Apple. And okay, what is the point of Apple? What it should, what should it be doing? How should the company be run? Should be run simply for the benefit of shareholders, or is there group of stakeholders that we should be taking into account? And I would argue that there is something a little weird about a company where, you know, you look at the iPhone and pretty much every part of that device that is smart was funded by basic US government research. And yet you have now, you know, the world's most successful corporation taking Just enormous profits, putting them in offshore bank accounts so that the US government cannot get a share of them and handing back money to the richest Americans. Creating, creating the wealth divide, enlarging it, making less jobs than the previous generation of tech companies did. That just doesn't work. I don't think that that sustains an economy like the US And I think that you just have to rethink. And there are other governments, I mean Israel, Norway, there are different ways of dealing with this sort of paradigm.

[Kathy O'Neill]

Can I just jump in and say like we've talked a couple of times about the buybacks that Apple's done, but as I understood in your book and until reading it, I didn't really get that this, they're not actually buying back stocks with their profit. What they're doing is they're leaving their profit offshore to avoid taxes and then borrowing money from the market and then distributing that money. So it's just, it is entirely a way to avert taxes.

[Rana Foroohar]

That's right. And can I just. One more thing that Apple does that's amazing, which Bloomberg has covered very well actually, is that a lot of these big tech giants actually now underwrite corporate bond offerings the same way that say a Goldman Sachs used to do. I mean they have so much cash on hand that they're, they're acting like banks now, but they're not regulated like banks. I mean it's just an interesting paradigm.

[Felix Salmon]

They're huge buy side investors. Right. And much less transparent, tend not to be particularly regulated. And that we can talk about whether or not that's a good thing. But we have this situation where Apple is throwing off huge profits mostly outside the U.S. those profits are staying outside the U.S. for, for tax reasons. It's leveraging itself up inside the US because some bean counter MBA type reckons that they need a slightly different balance sheet and it's better to have a bit more debt and a bit less equity, which fine, if that's how they want it. No skin off my nose. I agree with you that the tax treatment of debt makes that a little bit too attractive and that we should make equity more attractive and debt less attractive. But the bigger question, which I still have for you, short of going back 40 years and making the US government some major stakeholder in Apple with a right to Apple's profits, what is Apple meant to do right now with its profits?

[Rana Foroohar]

I think it's an open question, but I think that conversation is being had at the highest levels. I mean it's interesting. The Obama administration is taking in meetings with some of the tech CEOs to talk about this issue. The fact that they are so incredibly cash rich that they offshore a lot of money that they create fewer and fewer jobs. I mean, just think about, forget about Apple for a minute. Think about uber, think about WhatsApp. Think about, you know, the next generation of tech firms that create even fewer.

[Felix Salmon]

I feel like Apple has created an enormous number of jobs, mostly in China, but still a lot, but.

[Rana Foroohar]

But less than GM or GE would have created. It's the scale of the way technology is interacting with finance. You get companies that can the same market share as the corporate giants of the past, but create fewer jobs. So. But the point is the administration has actually taken meetings with these companies to say, what can we do about it? And they're bouncing around a lot of crazy ideas, you know, everything from kind of, you know, writing checks to people to, you know, for the, for the value of their data to, to who knows what. But it's a conversation that's being had because the current model is very fragile.

[Kathy O'Neill]

Can I just jump in and say, like, I don't think it's a question of, of. I mean, a lot of people do think about it. Morally speaking. They're like, oh, Apple, those jerks.

[Rana Foroohar]

No, I don't think about that.

[Kathy O'Neill]

Yeah, no, and I think, I think one of the things I like about your book is that you're just basically saying this is actually what makes sense for them to do. And in some sense, you could describe financialization as the way that people in business have sort of taken that to the nth degree what makes sense for us. And they figure out that like these crazy, you know, offshoring and tax inversion, blah, blah, blah, all that stuff which is totally financialized, is actually good for their company in this current system. So.

[Rana Foroohar]

That's right.

[Kathy O'Neill]

Always is how do we change the system?

[Rana Foroohar]

It's the incentive. I mean, and that's kind of what I was trying to do in the book is in some ways just shine a light on. Here are all the really bizarre incentives that we have in the market right now. And here are the behaviors that they incentivize, by the way, just to kind of bring this kind of totally full circle. One of the fascinating things that I've found since my book has gone out in the market, I had thought that I would be getting a lot of calls from Fortune 500 CEOs that were like, yeah, great, you're standing. We're under so much pressure from the activists of the world. We love your book. Not at All, I mean, they're just afraid of their boards and they're trying to last for three to five years. I've been getting calls from financiers and hedge fund guys that are super interested in this because it's about growth. Ultimately it's about are we incentivizing broad, deep economic growth at a time when, you know, whatever you want to call the 2% economy, secular stagnation? Is this model actually creating underlying growth growth? Because at some point Main street and the markets do connect in that way and the finance guys know it.

[Felix Salmon]

And that's my big question for you, which is, which I put in a couple of different ways, but let me just try and boil it down to do we really think that there's a cost in terms of growth to the financialization of the economy? Is it the case that all of this money, if it was taken out of the financial sector and somehow put to better use, would make the economy stronger, grow faster, make the middle class richer again and so forth? Is that something which we can credibly believe?

[Rana Foroohar]

I would say yes. And actually there's some pretty deep studies. I mean, the BIS and the IMF have both done a lot of research looking at the size of finance as a percentage of GDP in economies. And basically what it finds is, yes, after it gets too big, it is a headwind to GDP growth. And it actually that that effect kicks in when finance is half the size of what it is in the US.

[Felix Salmon]

And that's intuitively correct as well, because finance, you know, we get obsessed with the stock market, but the real engine of finance is the bond market. And, and bonds are basically how, you know, just like governments and individuals have get crippled by debt. You know, bonds are debt and if you have to pay huge amounts of debt to your bondholders, that's going to be make it more difficult for you to be a really good company.

[Kathy O'Neill]

And you could also look directly because you have a chapter on consumer debt. Like the debtification of the average consumer has not really helped their quality of life.

[Rana Foroohar]

No. And actually in an interesting way, it's a marker of how deeply financialized the economy is because consumer debt grows in part because there's not underlying wage growth. And so the government, you know, each president, each administration, Republican and Democrat, starts taking policy decisions to keep people happy to paper over this slower growth paradigm which has been here since the 70s and kind of pass the bucks to the market and say, you know, we don't want to deal with that, create some financialized growth. I mean, Rajan was fantastic on this.

[Kathy O'Neill]

Let them meet student debt.

[Rana Foroohar]

Let them meet student debt.

[Felix Salmon]

And it is true that in the short term, if you rapidly increase the amount of debt in a sector or in an economy that's going to create this kind of sugar high. Yeah, but, but over the long term that's unsustainable. What that means for China is for something else. Another podcast entirely. But I want to move on to the other huge part of the finance industry which we haven't even touched on yet, which is the other huge part of what Adair Turner in the UK calls socially useless capital. It's not just bonds and so stocks, it's also houses. And so. Yeah, but before we go on to houses, I want to talk about another well form of financialization which is solar panels. Solar panels are an interesting investment because they are ethically happy. They help save the world from global warming. We basically want to maximize the amount of renewable energy that we have have in the economy. And one of the easiest ways of maximizing the amount of renewable energy in the economy is by slapping solar panels on everything. And ideally people would just reach into their pockets and pay a bunch of cash for these solar panels. But as we know, a lot of people don't have a lot of cash lying around. And so what you wind up with is this financial opportunity basically that you can finance the installation of solar panels around the US economy and get yourself a decent return on the order of 11% or so and have more solar panels in America, which is a good thing not only financially but also for the planet. So the way you do this, if you want to do this through a slate money sponsor, is to go to Wonder Capital. W U N D E R Wonder with a U which is based in Boulder, Colorado, which is approaches and it make, it allows investors to invest in solar projects not just in Colorado, but everywhere. And you have two choices. You can go into the Wonder Income fund which gives you 6% over a 10 year period, or the bridge fund which gives you 11% over a two year period. And it's all to be [e-mail] money wondercapital.com money money. Okay. Housing, housing, housing.

[Kathy O'Neill]

I have, I'm so fascinated by this topic because I've been sitting in horror.

[Rana Foroohar]

Yeah.

[Kathy O'Neill]

Watch post financial crisis, watching all these private equity groups buying up the foreclosed houses. And you really, you're also horrified.

[Rana Foroohar]

I am.

[Kathy O'Neill]

I want you to, I want you to like share that with me.

[Rana Foroohar]

I want to bond over my horror.

[Felix Salmon]

They're the liquidity providers. Okay. Let Me take the devil's advocate position here.

[Kathy O'Neill]

I knew it.

[Felix Salmon]

Which is. Okay, let's first of all put things in perspective. If you live like I do in New York City, you have seen house prices rebound enormously from the financial crisis. And in fact, they didn't even fall that much in the financial crisis. If you're in Miami or in another little baby housing bubble, if you're in London or Vancouver in, you know, house prices are through the roof and everyone's like, wow, you know, everything's rebounded. That's not true. If you. If you go to Ferguson, Missouri, more than half of the houses in Ferguson, Missouri, are still underwater from mortgages which were taken out before the financial crisis. If you go to Detroit, if you go to Baltimore, if you even go to areas around Oakland, California, which you think of as having this big housing boom. There's a lot of underwater people there.

[Rana Foroohar]

Totally. There's actually this great conference board study that about 60% of all the gains in the housing market since 2008 have been in the top 10 markets. So it's really, really bifurcated.

[Kathy O'Neill]

It's the rich people where they live versus everyone else.

[Rana Foroohar]

That's right.

[Felix Salmon]

And so, yeah, if you're not in San Francisco or Washington or New York, then it's a very different kettle of fish. But here's the problem. If you're in Ferguson or somewhere like that, or Baltimore or the south side of Chicago, Chaga, is that your house is worth so little that on an absolute basis, it's worth. It could be worth 30, $40,000. These are cheap houses. Now, cheap houses in principle are good.

[Kathy O'Neill]

That's what I was going to say. Why is it bad? I mean, we all feel sorry for the people underwater. I get it.

[Felix Salmon]

But in principle, cheap houses are affordable housing. And we all like affordable housing, especially when incomes are not rising. We want to be able to afford a roof over our heads. But here's the problem. If you're poor enough to be one of these people looking to live in a $40,000 house, you don't have $40,000 in cash to pay for that house. You need to finance it. Under Dodd Frank, mortgage companies are not allowed to charge more than 2 or 3% for a mortgage. It is not economical for any. Anyone to give out a $40,000 mortgage with 2 or 3% fees. It just doesn't make sense. And so the result is that there's no liquidity in these markets. Basically, these houses can't be bought. They can't be sold because they're Underwater, they can't be bought because no one can get financing and there's no way to get the market moving again. The market isn't clearing. So. So the least worst option in some weird way is for Blackstone to come in. Is it Blackrock or Blackstone? I can't remember. It's Blackstone. Blackstone to come in and start buying up these houses at $40,000 apart and renting them out. Now we know that in terms of the amount of house proud maintenance that people do on their homes and the quality of the neighborhoods and the quality of schools generally goes up if people, people are owners rather than renters. But at least you have a clearing market now and some option for people to be able to move into those houses, pay rent and be affordable.

[Kathy O'Neill]

Are we going to be allowed to talk?

[Rana Foroohar]

I have a whole chapter on this. I'm ready whenever you are.

[Kathy O'Neill]

Let's hear it.

[Rana Foroohar]

Okay, so chapter seven of my book is this. And listen, you know, let me start by saying you're making a valid point that you have to have someone in these markets that are really, really beleaguered, like what you're talking about, put a floor on the market at some point. And there were places like this all over. I spent a lot of time in the Inland Empire in California right after the financial crisis. San Bernardino, Stockton, some of those places were really, really hard hit and still trying to kind of, you know, wade their way out of the crisis. And interestingly, Blackstone has become, via Invitation Homes, which is one of its subsidiaries, one of the biggest landlords in these places. And in fact, Blackstone is the biggest single family homeowner in America now, which is kind of amazing. Now, okay, you can argue that they came into some of these markets and put a floor on. But here's the rub. The reason that they were able to do that is twofold. One, the traditional banks were hamstrung from doing this in part because regulations dating way back to the 70s actually make it difficult for them to do that without writing in clauses to keep housing affordable for local communities. There's a lot more sort of of check and balance on what the big banks can do in housing. Private equity didn't have those checks and balances because it's much less regulated. What happened right after the crisis is while the entire country was busy dealing with the too big to fail banks, private equity came in and just bought up all of these amazing deals on the courthouse steps. There were no provisions saying you had to keep a certain percentage of the housing affordable. You had to have certain provisions about how you acted as a landlord when you started renting all properties out. And as a result, not in every neighborhood, but in a lot of neighborhoods, you have unemployment rates that are higher than the national average, but rents that are also higher than the average. So you don't have a market that's reflecting the economic reality on the ground.

[Kathy O'Neill]

I mean, I actually. So I'm thinking, like I've been skeptical for a long time about this American dream of you have to have a house.

[Rana Foroohar]

Yeah, well, that's true.

[Kathy O'Neill]

So theoretically it's okay to have landlords, but the question is whether these are responsible landlords. And it doesn't look like they are. They're raising rents and making things unaffordable for the people living there. And it's not particularly good place to live anyway.

[Rana Foroohar]

Talk about an industry that's really populated by makers. I mean, landlording is a very mom and pop business. Right? I mean, talk about something where you really need to know your customer, you know, you need to, you're in these people's homes, you know, and this is not something I would think that a private equity company is particularly well set up to do. And there have been a lot of community activists that have done reports around invitation homes. A lot of complaints about how these properties get taken care of. I tried to actually do a big interview with them from my book and they declined. So I don't have a whole lot of information about that.

[Kathy O'Neill]

But we have, we have some idea. Because you talked a little bit about how distant the landlords are, how you can't actually even find the person to complain to.

[Rana Foroohar]

That's right. And that's a key thing because I did speak to some community activists and civic leaders that said, you know, private equity can work work when it's more closely tied to the community, that they've had much better experiences with local players that are invested, that are not going to cut and run, that have a reason to be there and stay in the community. But, you know, you're raising another point which people like Bob Schiller, Bob Shiller, the Nobel winner from Yale, have said, which is that should our economy revolve so much around housing? And that's a whole nother question. The problem is that all the pieces work together. I mean, you know, homes are still where most middle class people keep their wealth. And until we kind of rejigger the entire system, I think you can't argue that we should become a renter society en masse.

[Felix Salmon]

So I'm a huge believer that we have far too much home ownership in the uk. I mean, it's not in the US but certainly in the UK as well.

[Rana Foroohar]

Definitely.

[Kathy O'Neill]

Yeah.

[Felix Salmon]

That it's damaging because it impedes labor mobility. If you own a house, it makes it much harder to move somewhere else for a better job. And it obviously it is a highly leveraged financial asset which, as we saw during the financial crisis, can really bite you during the point at which you don't want it to bite you. And I feel like everyone would be much better off if we were just Germany and everyone rented.

[Rana Foroohar]

Unless you were Italy and then you'd be really sad if everyone was Germany.

[Felix Salmon]

But the big thing is that, that.

[Kathy O'Neill]

Can I just echo that? I mean, the fact is we're better off if we have a consistent rent every month. And the risk is on the private equity guys. I don't have a problem with that setup. I just want them to be good landlords.

[Felix Salmon]

Okay. So the problem is that the way that the US is set up right now is that you have essentially rental ghettos. You have vast areas where every. Everyone owns their home and then vast areas where no one owns their home and everyone rents. And that's the worst of all possible world.

[Rana Foroohar]

That's right.

[Felix Salmon]

Because what happens is that the rental neighborhoods tend to be poorer, they have worse schools, that you don't get any of the ancillary benefits from having homeowners. And what we need to do is have much more renting in high income neighborhoods and much more owning in low income neighborhoods neighborhoods. And that would be a better mix. I just don't know how we get there from.

[Rana Foroohar]

Well, it's interesting. I mean, housing policy, Getting the right housing policy is a huge part of getting the makers and takers situation. Right.

[Felix Salmon]

So the first thing we can all agree on is that we need to abolish the mortgage interest tax deduction.

[Rana Foroohar]

Oh, God, yes. And I'm going to come clean and just say, like, I live in a brownstone in Brooklyn and there is no way without that tax deduction I would be living in that brownstone.

[Kathy O'Neill]

But without that tax deduction, it wouldn't have cost as much.

[Rana Foroohar]

That's right.

[Kathy O'Neill]

It inflates prices.

[Rana Foroohar]

It so inflates. I mean, it is crazy. I thought I bought at the top of the market in 2007. Nope. It's nuts what those deductions do and how they distort the market. We really should abolish them.

[Felix Salmon]

Okay, So I think that's probably what we have time for in terms of the book. But you're going to. I have a feeling you're going to squeeze something in the numbers round, which is going to be book related.

[Rana Foroohar]

It is.

[Felix Salmon]

But before we move on to the numbers round, I need to talk about Open Account, which is a podcast created by Umpqua bank and hosted by Sujin park, which talks less about these huge big macro issues and more about the day to day micro issues around money and how awkward it can be and how it's connected to culture and power and class and emotions and how difficult it is to just basically face a huge amount of these issues surrounding personal finance and money. So Su Jinpa is the host. She has.

[Kathy O'Neill]

Can I just say that I was like nervous the entire time I read the retirement chapter, so maybe I should listen to this podcast. The retirement chapter made me want to commit suicide.

[Rana Foroohar]

I know, I know.

[Felix Salmon]

By the way, you have two choices, Kathy. Number one, you can try and deal with this, or number two, you can put your head in the sand.

[Kathy O'Neill]

Let's do that.

[Felix Salmon]

Yeah. I feel like denial is nearly always the right thing to do, but if you feel like peeking out from picking one eyeball out from within the sand, one way of doing that is to subscribe to Open Account, which you can find in any Apple or podcasting store. It's very easy to find, of course, it's free. So download and subscribe to OpenAccount in overcast or Stitcher or the itunes store, wherever you find your podcasts. Okay, so numbers.

[Kathy O'Neill]

Yeah, I have a sad number this week. I don't know about you guys, but I've been reading a lot about Venezuela and what a terrible situation is. So the rate of death among babies under a month old has risen by a hundredfold since 2012 and it's now at 2%, which is really a lot.

[Felix Salmon]

That's really scary. That's like medieval.

[Kathy O'Neill]

It is medieval. Yeah, it's awful.

[Felix Salmon]

I'm going to just swiftly move on from that. There's nothing I can say about that. My number is 671,000, which is the number of papers which are freely available on everybody around this table's favorite website, which is ssrn, the Social Science Research Network. I know that Rana shares my. Like we go there all the time to look things that SSRN has just been bought by Elsevier.

[Kathy O'Neill]

Oh no, no, no, no, no, no, no, no.

[Rana Foroohar]

Wait, are my free PDFs going away?

[Kathy O'Neill]

Are they going to charge?

[Felix Salmon]

So we can only hope that Elsevier is not going to kill the goose that laid the golden egg.

[Kathy O'Neill]

Oh my God.

[Felix Salmon]

But people are not happy about this.

[Rana Foroohar]

All these numbers, my number is depressing too.

[Felix Salmon]

What's your number?

[Rana Foroohar]

So sorry, but it's four. It's a small number, but a depressing number. $4 of debt is what it takes to create every dollar of growth in China now and China. You're right. I am going to find a way to connect this to makers and takers. The rise of finance and the fall of American business. China is the next theater of financialization because China not only has this incredible debt crisis that everybody knows about, but it is in an interestingly similar political situation to what the US was in in the late 60s and early 70s when US growth started slowing and we had these administrations that passed the buck to the financial markets. The Chinese are in that position too. Their growth has slowed. They need a new paradigm. There's a big fight going on as to whether it's going to be financialized growth or something different.

[Felix Salmon]

So $4 of debt per dollar of growth, that's more or less the same as we have in the U.S. well.

[Rana Foroohar]

But five, five, six years ago in China was a dollar to dollar, you know, so that's a run up. That is incredible. And as we know, the pace of increase in debt is more important than the show. Sheer amount.

[Kathy O'Neill]

It's not looking good.

[Felix Salmon]

That's a quick yet depressing numbers round.

[Rana Foroohar]

You're welcome.

[Felix Salmon]

I'm just going to end this podcast at this point because I need to go stick my head in a bucket of something. Thank you for listening to Slate Money. Thank you for all of your feedback and letters. We love them. You can always email us at Slate [e-mail] Thank you to Audrey Quinn for producing and to Steve Lichti and Andy Bowers, the executive producers here at the Panoply [e-mail] Panoply but most of all, thank you to the one and only Ranif Haruha. Her book is available in all good bookstores and even at a fang like Amazon. If you want to do it that.

[Rana Foroohar]

Way anyway, buy it anywhere you can.

[Felix Salmon]

Amazon doesn't make profit, so we should just support them, right?

[Kathy O'Neill]

I highly recommend this book. It's really excellent.

[Rana Foroohar]

Thank you guys. Thank you for having me.

[Felix Salmon]

It's a pleasure. And we will talk to you all next week on Slate Money.