Ted Audio Collective.
Hi, everyone. You're listening to After Hours.
I'm Yang Mi, and I'm here with me here in Felix.
Hey, guys. Hey, Yang Mi.
So we are actually taping this in the morning.
And so you guys are looking kind of scribe.
Are you awake? Can we do this?
This is a little early for us.
Yeah. It's called After Hours, remember?
We're not supposed to do this, really.
Exactly. Well, unless you've been up all night.
Yes. I have this experience.
I sometimes go out.
I live in a place that has lots of nightclubs, not so far.
So I sometimes walk out on a Sunday morning to get bread.
And I see all the kids come out of the clubs and I look at them and go, oh, my God, I'm so happy I'm not young anymore.
No, you know you're old when you see other people finish partying and just looking at them makes you tired.
And you know that you're old.
OK. But we brought in topics to talk about, right?
Absolutely. OK. So I brought in a topic.
I want to talk about modern monetary theory.
I'll explain why. In the morning.
I'm just praying that by saying that we haven't lost all of our listeners.
Bear with us. OK. I'll explain why I want to talk about it.
So I would love to talk about WeWork, one of the darlings among US startups.
Excellent. Great talk.
OK. Felix, you want to talk about WeWork.
Yes. So let's call it WeWork.
We company. We work.
We live. We grow. We refuse at least for the time being.
So I'll call it for the purposes of this episode.
I'll call it the WeWork company.
And it's this amazing story how someone takes an idea that feels like an old idea and probably is an old idea.
To lease office space, refurbish the space, and then rent it out to both individuals, but also small companies.
And it's been an amazing success.
Not in any financial sense.
They're losing roughly two billion dollars a year.
But in the sense that it's gotten prominence.
I think the brand is well known.
People have a sense of what the company stands for.
And at least by the appetite of some investors, there must be a bright future.
So I'm puzzled. I just wanted to ask you, what is special?
What is different about these guys?
It is an incredible company.
I think they're not even 10 years old, I think.
Nine years. Is that right?
OK. So there was both a business insight as well as a sociological insight.
So the business insight that there's this market inefficiency around long -term versus short -term leasing.
And I think that was really smart.
But then the sociological insight that has to do with the changing way we work.
And the way we want to work.
And it wasn't that long ago where the idea that your workplace could be a cool environment was ludicrous.
And now it's one of those things that we expect.
We expect our workplaces to inspire us in some way.
And I think WeWork has really contributed to that.
Having said that, their current valuation so exceeds the reality of their business.
And so we can get into it.
And I think that the distortion field created by SoftBank money plays into this.
But it is one of those weird moments when you see a company that is very exciting.
It's an exciting company.
But the financial reality is, I don't know.
Just to dig down deeper on the financial side, it is ugly or crazy or however you want to think about it.
The most recent valuation is around $40 to $50 billion, spurred on by a SoftBank round that just went in.
There are companies that look like it that are valued dramatically differently.
So Regis is a good example.
And so if you kind of did comparable multiples, instead of being valued at $40 or $50 billion, which is what SoftBank put money in recently, it's coming in more like $3 billion.
And Regis is not as sexy.
And maybe the inside does not have the free beer or whatever.
But fundamentally kind of the same.
So I think the interesting thing about this from my side is about MegaVC.
And I think it's about the desire of SoftBank, which has now made me work, I think it's largest investment, to write big checks very quickly.
And that is just pumping up its valuation at an even higher rate.
Just last year, they put in money at $20 billion valuation.
So they've doubled it at least on paper.
And I think that's highly distorted.
When you have MegaVC, you have someone like Masasan who comes in and leads multiple rounds and creates a self -fulfilling prophecy of escalating valuation.
That's self -fulfilling until one day suddenly it's not.
It's really difficult to discern what's behind that valuation because you're not having others come in and take a look at this.
Because one of the checks that we have on legitimacy in the private market is when you begin to bring in new investors that are looking at things with fresh eyes.
And creating their own independent sense of what a company is valued at.
In this case, that's not what we think.
That's a great instinct, which is when you see the inability to syndicate an investment that's telling you something, which is there aren't people willing to validate that valuation.
That just on its surface is a smell test kind of version of this.
So the really interesting question is about growth and what the growth trajectory is.
Because that's ultimately what this comes down to, right?
Which is, you can get to $40 billion if you assume stratospheric growth for a long time.
I mean, it's interesting.
The WeWork people would say the reason that they don't show great profitability is because they're growing so quickly.
So there's lots of costs right now because you're refurbishing all these office spaces and you do it all the time.
Now, at some point in time, those investments should presumably plateau.
If it's not really bad news that by the time you're done with your 85th market, you have to go back to the first and you have the same expense.
This is why the growth rate matters, right?
The trajectory matters, which is if they grow at 60%, 70 % for the next 10 years.
I'm not thinking it's going to happen, but if they do, you can get to something that maybe looks consistent with the reality.
But it assumes this massive growth rate.
The interesting thing to me is embedded in what you said was people don't understand how capital intensive this business is.
This is to me what is really interesting about this company as well, which is there's this myth of we're just going to build it and then there's no more cat -backs and there's no more cash outlays, and then we just are making money hand over fist.
Our discussion about Netflix is a little bit like this.
The discussion about Tesla is a little bit about this, which is it's a capital intensive business.
So let's give the company the complete benefit of the doubt and let's try to imagine a scenario in which they grow into this valuation.
When I look at their economies of scale, they're all old world economies of scale.
So material goods like furniture and so on, services like janitorial and printing and things like that.
And then membership, like if you're a member of WeWork, you're a member all around the globe.
But the valuation is a tech valuation, which implies something exponential.
And so if you were to give them the benefit of the doubt, I think what they would say is that this is a technology company and that we're building an AI infrastructure that's going to enable us to generate a different kind of economic base than other real estate companies.
And then when I dig deeper into that and try to figure out, well, what's the AI advantage here?
And they'll say, well, we have the ability to load balance across the conference rooms and know which ones are busy and not.
When to hire new baristas?
Wow, I'm so impressed.
When you log in, the desk will - You mean it's like a hotel.
Well, the desk will remember the height at which you want the desk.
And we have a control center where we can peek into any of our WeWorks around the world and I'm thinking, what?
But this is the oldest trick in the book, which is you call yourself a technology company when you're really a capital intensive company that's an old economic company, right?
And I think you're absolutely right, that's what they're doing, right?
They're calling themselves a tech company because that implies very low capital intensity.
I think to justify the valuation, you have to have this massive growth trajectory, which means there've got to be, I think, some kinds of new verticals.
Yeah. So there's a plan for, I'll say, a dozen other We -something.
But the two that seem to be operational or relatively close is WeLive is residential space, essentially often close to office space.
And so the idea is, not only do I work in a WeWork office, I also have a WeWork apartment and I live there.
But it's interesting because you'll have your own apartment, but they're shared spaces, like shared kitchens and things like that.
That's right. Yeah.
So it's a little bit like being back in college.
And if you're nomadic, it's a membership, right?
So you can move around the world as well.
Yes. I mean, I do think it's interesting.
I just don't see it.
I mean, imagine if we said we were going to start a global residential real estate company that just catered to people between the ages of college.
25 and 30. That would be silly.
But that's essentially what this is, am I right?
Well, I mean, to give you the benefit of the doubt would be when you have really, really high real estate costs in these cities, this is an alternative living arrangement which can be sustained.
I'm trying my best, right?
Yeah, it's still...
Still, you're right.
The demographic is narrow.
I think the nomadic tribes that are running around the world, that's a very, very small demographic.
And if real estate price is correct, that business also contracts just enormously.
And then Regrow is an elementary school, plus a coding academy.
So all I can say is that this is a space that I think all three of us know very well.
Education is ridiculously difficult to do well at scale.
Maybe they'll crack it, but it is really, really hard to do education at scale.
Can I flip the conversation?
Why do we fall for these kinds of things?
Like we've tried to make an optimistic case, but why is it even starting very simple?
Like here's a company that comes across and says, we're a tech company.
And why is it that now, you know, every article that I read about WeWork describes the company as a tech company?
So a little bit maddening, like at that point in time when GE was a financial services company.
And people still talked about the company as if it was in manufacturing.
And that goes to two things, right?
One is there's just a never -ending appetite for self -delusion.
People want to believe things that are inherently kind of unbelievable.
And then the other related point is with the boom and bust cycle of venture capital, we have these periods where markets get hugely overheated, and they are really problematic.
And this goes to SoftBank with a hundred billion dollar venture fund, and that makes it even worse.
The final thing I will say is, you know, it's the really important point you made, Felix, about financial journalism.
Like there is so little good investigative journalism, right?
And so this notion of like, oh, they call themselves a technology company, you take their language straight off the PR release and you adopt it.
And it's terrible. And then it propagates.
We're delusional, but we're not.
It's interesting. The most recent round was supposed to be much, much bigger.
Yes. And then it ended up being two billion.
And the reason for that is SoftBank's limited partners came back and apparently just said no.
I mean, it is so unusual for LPs to say, you know what, we actually don't want you to do this.
I do think that sometimes in an unfortunate way, the incentives of journalists and publishers are aligned with entrepreneurs who want to tell the next big story.
If I come out and I write about Weaver because, oh, look, there's this new office leasing company and their offices are much nicer.
And the editor is going to say, really?
Like you want me to publish this thing?
If I say, oh, this is a story about a novel type of tech company that now revolutionizes the way we should think about office space.
That is, of course, how we sell news.
So in a not so fabulous way, sometimes entrepreneurs and the financial and the business press are in cahoots because they both live off the attention that we pay to these new ventures as investors but also as readers.
And of course, we'd be remiss if we didn't talk about the actual asset allocators and investors who have incentives to put money to work sometimes and not miss the next big thing.
And you don't care that much about the long run reputation because it's all going to be done by then.
Then you're going to be writing big checks at foolish levels.
So I think this story encompasses a lot of things about the press and about investors and about these business models that are being rechristened tech business models when they're not necessarily so.
I think you're right, young me, which is it is part of what they've done is really exciting.
Oh, I think so. I mean, I really do.
I think they've forced all companies to raise the bar.
And it is interesting to see in the early days of WeWork, most of their membership base was contractors and startups and increasingly their membership base is being driven more by big companies.
Larger companies, exactly.
And so it does give you a sense of the impact they're having on corporate lives around the world.
So it'll be interesting to see how much financial success a good idea can produce as always.
And I guess the two things that are hard to sort out is what's the role of venture capital here that we get to valuations that look at least for the three of us quite unreasonable.
But also, how much room is there for reimagination in the space that they're in today?
We know what a WeWork office is today.
We have no idea what a WeWork office can be tomorrow.
Interesting. All right.
I want to talk about modern modern theory.
I do. And here's why.
So this was a phrase that I probably first heard more than a decade ago and then never heard again.
And then lately, it's all I hear.
It's everywhere. It's everywhere.
And this is one of those occasions where I felt lucky to have two economist buddies that I can come in and really push hard on this idea.
It's really remarkable in our current political landscape how many huge ideas are floating around.
So Medicare for All, Green New Deal, let's rebuild the infrastructure.
And then the question is always, well, how in the world are we going to pay for it?
And the progressive side of the Democratic Party, the response has become, well, there's this economic theory called modern monetary theory, which basically means we don't have to worry about that.
I mean, that's essentially that's how it's been cast.
Now, the central thesis of modern monetary theory as it is being communicated today.
And you guys can clarify whether or not this is accurate, is basically this notion that you can borrow as much money as you want if it's in your own currency, because you can just print money and you can pay it back.
So as long as you're borrowing money in your own currency, you don't have to worry about running up these huge deficits.
And I have to say that if you are anyone who's ever taken even an introductory course in economics, there are a couple of things which makes modern monetary theory, MMT, sound insane.
The first thing is that there's a reason why governments just can't print money whenever they want, because when governments print too much money, many, many bad things happen.
Inflation can happen.
And in extreme cases, you can have hyperinflation.
This is how countries fail.
Your exchange rate can depreciate, your currency can become worthless.
These are really bad things.
The second thing, any government, you can't just run up deficits indiscriminately.
Big deficits are bad.
You need budgetary discipline.
And the reason they're bad is when you have huge deficits, it does crazy things to interest rates, it starves the private sector of any kind of investment, and then the economy just starts to tank.
So first of all, is the way that MMT being talked about today, how accurate is it?
And is there any validity to the idea?
So I'll say two things at the outset.
First is when you first read about MMT, it is a little bit of a mind -pending experience.
So just as you alluded to, young me, like so many of the things that you just make complete intuitive sense, you're sort of taught to rethink some of those.
The second thing that I'll say is most of the proponents of MMT are terrible at explaining their ideas.
It makes you doubt whether or not they truly understand the idea.
The basic notion I think that is most interesting and most provocative is that as a government, you don't have to worry about your level of spending.
Let me isolate the key idea.
Imagine what happens if the government actually spends money.
Typically we think governments get to spend money because they have tax revenues and governments get to spend money because they sold a bunch of bonds.
And MMT says, no, that's the wrong way around.
The real way to think about this is every time government spends money, it actually creates the money that it spent because it comes out of this account in the Federal Reserve that was not available to the economy as a whole.
So technically speaking, the money supply increases.
But Felix, isn't this just semantics?
In other words, isn't this at the end of the day, there is some ledger and there is a supply of money that is circulating in the economy.
Some of that money gets sucked out of the economy when we collect taxes, when the government collects taxes.
Some of it flows back in when the government spends money on stuff.
So even if technically what you describe might be true isn't at least conceptually, there is a money supply, there is a ledger, and the notion is a ledger can't get too far out of whack.
I think MMT and classical economics, they both agree there is a point above which government spending becomes problematic.
And very often in balanced budget discussions, the conversation is around, oh, you cannot spend money that you don't have.
Or then there's a notion, okay, so you can spend money that you don't have and so you run a deficit.
But if the deficit becomes really large, that's really super problematic.
The MMT view is the real constraint on government spending is the productive capacity of the economy.
If you spend more money, then workers can work hours and capital is available for capital projects, that will result in inflation.
But whenever you have an economy where we say, oh, we have really fabulous investment projects that will bring us great returns, then the government can spend as much money as it wants and there's no cost to it.
Once you recognize that government spending, there's infinite spending power.
Whenever someone tells you, oh, look, it would be really nice to have Medicare for all, but we just can't pay for it, that's just bogus.
So I confess I have a slightly jaundiced view of this.
I think it's like an incredible example of the emperor has new clothes.
I don't think there's anything there other than maybe a framing device for understanding the world.
So the critical thing that this is in the backdrop of is concern that we pursued austerity too significantly around the world and that when we needed big fiscal pushes, we weren't able to do it because everyone got worried about austerity.
And so we got obsessed with debt.
And so this is like a pushback against that from a framing device, which is stop thinking about debt.
That is true. The central insight of MMT, which is right, I think, is that what matters is debt to GDP.
We don't care about debt per se, we care about debt to GDP.
So for our listeners, all that refers to is the size of the debt relative to the size of the economy, essentially.
So wealthy economies can afford to carry more debt in poor economies.
Very, very simple. Right.
And I think, you know, a couple of people have made this point rather trenchantly.
Actually, interest rates have been low and growth rates have been high in that world when interest rates are low and growth rates are high for the economy.
Guess what? You should take on debt.
Why? Because then debt to GDP won't actually rise.
Then it's actually good, actually, to issue debt.
And it certainly doesn't come with the social costs that we might care about.
That is true. By the way, there's nothing new in that.
The dangerous part about MMT is, first off, it gives rise to this loose thinking.
Well, you can print money!
It's all good! You know, which is really loose thinking, I think, and wrong.
And the really, I think, intellectual part that's problematic is, and Felix, I think you got at this really nicely is, usually we think fiscal policy is what?
You want to spend money on something?
Then you have to tax to offset that spending.
What is monetary policy about?
Inflation and the price level.
And MMT flips it. That's exactly right.
It totally flips it.
It says, no, no, no.
Monetary policy is about funding.
These projects you want to do.
And then, consequently, you still have to worry about inflation.
So fiscal policy becomes about inflation.
And that is kind of ass -backwards.
Okay, so I'm going to translate what you just said for our listeners.
Okay. So the way we traditionally think about the different roles of different parts of government are as follows.
Congress finances the stuff we need to do to make our society run.
Congress authorizes, yes, you can spend money on X and Y.
And if things get a little out of whack, then we expect the Fed to come in and use interest rates or whatever mechanisms they have to bring everything back into balance.
Right. What Mehere is essentially saying is that MMT flips this on its head and saying, no, no, no.
We're going to have the Fed finance anything we need.
And if we get into trouble, we're going to have Congress step in and say, hey, let's raise taxes to bring it all back under control, which feels like very poor institutional design for no other reason that raising taxes, really unpopular.
We have a really dysfunctional Congress.
And so the idea that the check on monetary policy and the check on economic health is going to be our confidence that Congress is going to step in and intervene if things get a little out of whack seems really, really unrealistic to me.
I think that's exactly right.
The institutional details are really important, right?
Because this requires really active tax policies in response to the price level and inflation.
And I don't think that's realistic.
And that's the underbelly of MMT that no one really wants to talk about, but is really the part that makes it crazy.
What's the point of having an independent central bank?
The point of having an independent central bank is so they make decisions that are about the price level and not swayed by political decisions.
So a few things I agree with you, Mehere, and then I think a few things are not exactly the right way to think about it.
I think the conceptually important part to understand is here how government spending and taxes are related, not as a result of, oh, my God, we don't have the money to pay for projects, but as a result of, we need to make sure that we don't run into a situation of hyperinflation.
I think that idea is separate from the institutional setup that we need in order to enact something like MMT.
Do I have confidence that Congress will increase taxes once inflation starts creeping up?
Zero confidence. I think that would be zero confidence, then what controls the price level?
What controls inflation?
So what I'm saying is if you start rethinking, there is no reason for us to ever have unemployment.
There's no reason for us to ever not invest in valuable public projects.
And there is a reason for us to have tax policies that adjust so that we don't run into hyperinflation.
As a result, just like we created an independent Fed, let's create an independent institution that administers the level of taxes.
But if you don't have a tax system that is flexible enough to move according to what's happening with inflation, unemployment and GDP and other metrics, if you don't have that kind of tax system, then the logic falls apart.
Let me add one other piece to that, which is it falls apart and we know that tax policy is slow moving.
And we know that monetary policy is fast.
Highly politicized.
Highly politicized and slow moving and monetary policy is fast moving and less politicized.
But that's by institutional design.
No, no, no. That's because tax policy is slow moving.
It takes time. Why should that be always the case?
Because it's not a present value.
When you take money away from people, it's very personal and people get very animated by it.
I don't know if that's if that's exactly right.
I think what MMT does is it encourages to think about things differently.
And do we have the institutional setup to make that work?
Absolutely not. What's the feasibility of the feasibility of the institutional setup?
I mean, how long does it take to raise an interest rate?
10 seconds. How long does it take to pass a law and then have taxpayers pay taxes a year?
I am shocked how unimaginative you are.
That's just how we pass tax.
It's called reality.
It's just how we pass tax laws today.
I will say the following and that is even thinking about MMT has maybe really questioned the assumptions we have about when is it healthy to have a deficit?
When is it healthy to spend more?
Maybe this is the constructive heuristic that should come out of this.
This notion that it's not a question of can we finance it?
The question is, can we demonstrate that the return on whatever it is to finance it is worth it?
That's exactly right.
Then we should do it.
Yes. A good example is education.
Education is a no -brainer.
We know every piece of research says it has really high returns.
Pre -K. We very endlessly around do we have the funds?
Do we not have the funds?
I think the core of MMT that is really interesting is if you have good evidence that spending is productive, the financing is the last thing you should be thinking about.
And then the flip side, which is, Meher, your point, which is it's not licensed to print money.
And if we adopt this mentality, we're not institutionally equipped to handle all the worst case scenarios around.
Not only institutionally ill -equipped, I don't think it's feasible, right?
But I think your point is the right one, which is if it changes the conversation from can we finance this to are we going to earn a rate of return?
I think that's great.
But again, yes, education is a slam dunk.
Pre -K is a slam dunk.
Are you signing up for free college for everybody?
That's a little more complicated.
You know what I mean?
It gets complicated.
So I don't think there's this, we have to be judicious about this because the worst thing that can happen is we end up with an avalanche of government spending, turns out to be grossly inefficient, and then we've disillusioned another generation from undertaking projects that are really quite worthwhile.
Great. Okay. You guys have picks for me?
I have a pick. Okay.
Which is a little bit sappy and I'm going to go for it anyway.
Oh, I like it. You like sappy?
I do. I'll dress it up as a little more sophisticated, which is, you know, we wonder about how corporations can use video in really good ways.
Yeah. So I have, I think, a great example.
I have a lot of problems with British Airways, but man, do they use video well.
So first, if you've seen their new safety videos, they're really fun.
With all the celebrities.
With all the celebrities.
They're so fun, really interesting.
But that's just kind of the tip of the iceberg with what they're doing with video.
So they have something called hashtag BA magic, which is these five minute videos where they basically create these sappy stories and they follow people who are getting reunited with their loved ones.
And then there's like a mother who hasn't been visited by her son.
Where do you find these on YouTube?
Yeah, they're on YouTube and.
You went on YouTube to look at British Airways.
So it was popping up in my feed.
A lot of them are about India and they have like, you know, the grandson and the grandfather get to take a trip together and the video is there.
And it's just like rip your chest open, squeeze your heart out and just get the tears.
And so hashtag BA magic.
If you're looking for a good sob story or the reason it's all very uplifting by the way, nothing's bad, but it is.
It's really fantastic and it's super sappy.
Okay. So if you're in the mood for that.
I have one. You know, so I've always been disdainful of people when it comes to an activity or hobby or sport where they buy equipment that far exceeds their skill level.
Yeah. So you know how I just started cooking?
Yes. So I've broken my own rule with one object and I bought a chef's knife and so I am now one of these people.
Good investment though.
I have purchased a piece of equipment that far exceeds my skill level.
So I'm one of these people that I used to be to stand below.
And are you loving?
It's unbelievable. So when I first got it, it actually intimidated me because it's so sharp.
I mean, I almost, I almost lost a digit.
You kind of have to grow into it a little bit.
So I took the advice of my dear friend Felix.
Remember, was it you that recommended wire cutter one time?
I did. So I went in the wire cutter and I searched for the best chef's knife and I got the MAC MTH80.
He says MTH 80. Which is from Japan.
Apparently it's the top rated knife on there and I bought it and it's changed my life.
So that's my recommendation.
That's fantastic. Okay, Felix.
I have a geeky recommendation.
I find often in media consumption out there, these competing claims.
Sometimes when I watch Fox News and then when I watch MSNBC 10 minutes later, I think, am I really living?
Is this like an alternate universe?
Like the very basic fact.
It's just so radically different.
So the recommendation that I have is for something called the General Social Survey.
This is a survey that's been done in the United States since the early 1970s.
And they have just created something called the GSS Data Explorer, which basically allows you in the most simple of ways to just access the results of 50, 60 years of survey research.
If you wonder are millennials happier or not quite as happy as everyone else?
The question, do you feel respected at work?
Would young people say they're not as respected?
Would married people say they're more respected?
And it's all done with Tableau, which is like beautiful graphics.
The only downside is once you start, it's hard to stop.
But it's really you just feel like, oh, now I can make sense of the world in a way that I often otherwise feel is often hard to say.
So say that one again.
Oh, yes. So it's called the General Social Survey and it's the GSS Data Explorer.
If you go to the General Social Survey website, you'll see on the right -hand side, there is the Explorer tool, which allows you to look at data in a really neat fashion.
Okay, good recommendations.
All right. Thanks for listening, everyone.
This is after hours.
Thank you.
