Ted Audio Collective Hi everyone, you're listening to After Hours.
I'm Youngmi and I'm here with me here in Felix.
Hi guys. Hey Youngmi.
We are coming to you tonight from New York City, a hotel room in New York City.
So if you hear background noise, the street below, that's what you're hearing.
It's not Felix. So, how many pounds did you put on over the Thanksgiving holiday?
Oh, I thought you were going to ask how many pounds was the turkey?
I thought you were going to ask how many inches.
How many inches? We could go with any metric you want.
On the waistline, yeah.
I actually looked up online for our size party, what's the ideal size turkey?
And then, of course, you go to the market and everything is like five times as big as what you need.
It is just amazing how big a turkey can be.
Well, but I think we feel it.
So, for example, I always get way too much turkey, always.
I can't help myself.
I'm worried about running out.
And leftovers are as much a part of the Thanksgiving tradition as things.
No, but this is my week of atonement and recovery.
I was telling me here that I don't think I've seen a raw vegetable in four days.
So, it's time to get back to the regular routine.
OK, so we have a lot to talk about.
There's a lot of stuff that happened.
So much happened. Two stories I thought it would be fun to talk about.
One is climate change and then the soap opera that's happening with Nissan, Renault and Carlos Ghosn.
So, are those two good topics?
Those are great. All right, let's talk about those tonight.
OK, so on Friday, one of the slowest news days of the year...
You hope. ...the White House dropped their climate change report.
I'm sure it was a coincidence, young me.
So, this was a report put out by 13 federal agencies and it painted the most dire picture of what climate change is likely to do to the US economy.
Now, this comes on the heels of the UN, the International Panel on Climate Control.
A few weeks ago, they came up with their own extremely dire report on climate control.
But the picture that was painted was one of a future with an increasing amount of climate volatility, heat waves, flooding, fires, droughts.
And the cost of climate change is expected to knock off 10 % of the value of the US economy by the end of the century.
Really a sobering report.
So, my first question, of course, is what your reaction to it was.
What really popped out at you when you read this report?
So, I think the first thing is not to just look for the silver lining, but I think there's a piece of good news here, which is I was so delighted that the federal government is moving on its own pace without regard to what political leaders are saying.
This is kind of like your fifth -risk story, right?
Which is there's this big bureaucracy.
And if you look at the report and the website, it's fantastic.
I mean, it's like a huge...
It's really good. It's amazing.
The website is really fantastic.
The website is amazing.
So, that is a silver lining in this.
It's a monster of a report, and they're doing a very good job.
They're doing a really great job.
So, that's my little silver lining.
And I think what was also, I think, perhaps good news is, now framing this debate in terms of economics and politics, I think it's going to be very powerful.
So, for a long time, we've kind of relied on this notion of look at these temperature charts and look at how they're increasing.
And the reality is it hasn't done what it should do.
Now, we're beginning to think, first, about economics, which I think, for better or worse, motivates people and people get thinking about it hard, and politicians think about it hard.
And then the perhaps less kind of nice part about this is, I think part of the reason it's happening and it's going to be effective is because people are feeling it.
Like, it's becoming so much more tangible with weather patterns, with all kinds of things.
The recent wildfires in California...
It's stunning when you step back to think about it.
So, I think the good news is there's a government out there that's actually putting out great stuff.
And it's also good that we're thinking about this economically and politically.
I also thought that the framing was very interesting, in particular coming after a long period of time where I think those who worried about global climate change never found a way to find a frame that really resonated.
Remember the early attempts to say, oh, something really horrible is going to happen in 2050, then it turns out no one cares about 2050.
And so, I think there's a whole history of trying to make people feel just how big and dramatic a change this is.
And I just like Yumi here, I thought it was really interesting that now they're trying this route saying, oh, this is all about economics.
This is like 10 % of GDP.
And I'm maybe less optimistic.
I don't know if that's what's going to do it, but clearly like one thing that we're missing is what is the frame that will get us to act?
What is the frame that signals the urgency that it has?
And I really loved how they put fairly precise numbers on some of the issues.
For instance, $140 billion in lost lives as a result of heat waves.
The specificity with which the report pointed out the likely consequences I think was one of the really strong suits.
So, my reaction was not dissimilar to yours, but with one additional layer, and that is I continue to think that the way that we're telling this story is not motivating citizens with the degree of urgency.
And even with this particular framing, I think that continues to be true.
However, it is fascinating how it speaks to business.
I mean, it's impossible to read this report and not think, you know, if you're a tech company, to really think hard about the risk embedded in your supply chain or to be an insurance company.
And to look at the risks associated with fires.
And so, it was the first time I read something where I thought, my God, if you run a business, this is very real now.
I continue to think that for consumers, it's just, you know, I was thinking about this over the weekend.
If you had to invent a topic that was harder to engage consumers on, you couldn't invent one that was more perfect than this.
Yeah, super hard. It's super complicated.
The time horizons are so distant.
So, even things like, wow, this is going to happen by the end of the century.
I think most people think, you know, the climate numbers, one, two degrees increase, I mean, it's meaningless to most people.
But also, even as an individual citizen, even if you wanted to do something, there's really nothing that you alone can do that would make a difference.
And maybe that's okay because this is the kind of policy issue where we shouldn't rely on individual actions, right?
If we can get businesses to be really riled up about this, to the extent that any meaningful change is going to happen, that's where the pressure is going to come from.
Right, and it's not just businesses changing behavior, it's businesses lobbying and businesses exerting pressure on politicians.
But also changing the way they do business.
For sure, as well. Yes.
So, to me personally, like one of the really frustrating parts about the policy response to climate change is we know the solution.
It's cap and trade programs.
So the basic idea of a cap and trade regime is that you fix the amount of carbon dioxide that the economy can emit.
Say it's 100 million tons.
And then you allocate allowances to businesses.
Typically, these allowances are auctioned off.
So there's government revenue that gets generated.
And we can trade. If it's cheap for you to reduce, then you reduce, and I'm buying your allowances, and vice versa.
And it works. And what I actually find really interesting is we now have, we have local solutions, right?
So we have the California cap and trade system, we have one in Quebec, we have a big one in Europe.
We will get one for China in 2020.
And now what you see is California just linked its system to the one in Quebec.
Right. That means now you can trade across these different regions.
So in a way, we don't even need a federal response.
If we got business lobbying at the state level to either join or set their own, that's right, or I think is on the verge now of having its cap and trade.
So let me push back on that, which is I think the reason we need a federal response is because there are always going to be jurisdictions within countries which are conservative and will not adopt those regulations.
And then you're going to have the migration of a lot of industries into those states.
The dirtiest industries.
The dirtiest industries into those states.
And then you still have the same problem.
So I don't know. I think.
So we need a federal carbon tax.
I think the federal and carbon tax as opposed to cap and trade.
Like I'm a fan of a carbon tax because.
Oh, I completely disagree.
But yes, we can. Here, explain the carbon tax real quick.
So a carbon tax in some sense is fairly simple, which is it is a tax a dollar amount per unit of pollution produced.
It has the virtue of being kind of simple and straightforward.
There's not a lot of mechanism design associated with it.
It does raise revenue and it can be enacted at a federal level.
And indeed, of course, around the world, there are different versions of it.
So the big issue with carbon taxes is that it's hard to predict how much of a response you get, right?
You set a price and then the price will mean, oh, everybody's going to emit less.
But how much less? You don't quite know in particular for a policy like climate change, where what we really care about is how much carbon dioxide do we emit.
I think you want certainty in how much.
Carbon dioxide you emit, which cap and trade gifts you.
But Felix, your point about the carbon tax and how that doesn't actually allow us to control how much carbon is produced.
But that's a function of design, right?
If you set the tax high enough and find out where the sensitivity is, the biggest problem I have with the carbon tax right now is the numbers that are being floated for what that tax might be by orders of magnitude are too small.
I think the numbers that are being floated right now are like $10 a ton or something like that.
It'd have to be 10, 15 times greater than that for it to actually make a dent.
But conceptually, at least, if you were to set the tax high enough, then you would get a reduction in emission.
So I completely agree.
This is how the tax will work.
It will reduce, and we're not going to get it exactly right.
So there's a lot of design uncertainty.
But this is the kind of problem where you want design uncertainty on the prices that eventually emerge.
So no one quite knows when they auction off allowances in a cap and trade system.
It's sort of hard to predict what the price is going to be.
Sometimes it's a little higher than we think.
Sometimes it's a little lower just because there's uncertainty.
And that's okay because you get certainty in the quantity.
The big advantage is certainty in quantity.
But the urgency today is such that I don't want to spend 10, 20 years knitting together state -by -state markets to create this, kind of making yourself feel better that you're going to get this solved because Jerry Brown in California is going to create a cap and trade system.
I think we're kidding ourselves.
Meaning it's all the other states that will never create that state system.
We've got to focus all our energies on a federal solution.
Yeah, but if finding a federal solution feels absolutely impossible given the current administration, then the question is, what are the alternatives?
I mean, one of the things that I think the report made so soberingly clear was that the next 10 to 12 years are going to be absolutely critical.
And so I guess my final question to both of you is, absent any governmental response at either state -level government or the federal level, what should businesses be doing on a unilateral basis?
They should be educating consumers and citizens about the costs on their business of climate change, which is a way of saying, look, we are really going to be impacted by this.
As an employer, as a producer, prices are going to change.
We're not going to be able to hire as many people in as many places.
So I think maybe that explicit conversation, because I think education is an important part of this.
So what if you get an insurance bill, say, property insurance, and it would say, here is the fraction of your insurance premium that is due to climate change, just so that you see, just like we're seeing sales taxes.
I think one of the big messages of the report, the damage is being done today, the costs are here.
Oh, yeah, we're bearing the cost today.
I love this analogy that I once heard in a talk on climate change.
I forgot exactly who gave the talk.
But the analogy was to a bathtub.
Imagine a bathtub that is full of water.
And all you can control is how quickly does new water go into the bathtub and how quickly does it leave the bathtub?
Those are the policy levers that you have.
But the climate change issue is the water in the tub.
That's the stock versus flow idea.
And I thought it was a beautiful way to say, one reason why there's so much urgency is we can turn off the faucet today completely, and the problem is not going to go away.
The problem is going to persist.
Yeah, it feels so unsatisfying to end our conversation there, but to be continued.
To be continued, for sure.
Okay, guys, I have to ask you about the soap opera that's happening at Nissan Renault.
A little bit of background for our listeners.
So Nissan, Renault, and now Mitsubishi are part of an alliance.
And together, this group is the largest car maker in the world.
One out of every nine cars sold around the world comes out of this group.
The original Renault Nissan alliance was engineered by this guy named Carlos Gohne.
And he is known as coming in in the early 2000s and essentially rescuing Nissan at a time when it was really in trouble.
They were going to go bankrupt, right?
They were going to go bankrupt.
And this guy is French.
He comes in. Is he French?
Actually, I don't know if he's French.
French, Brazilian, Lebanese, I think.
Yes, very exotic. He's a man of the world.
Yes, he is. He comes in super charismatic and becomes this iconic figure.
In Japan 10 years ago, you could find cartoon mangas about him, about his life.
The alliance has not been without some tension, to say the least.
But if you fast forward, you have this guy that's holding this alliance together.
He's in his private plane over the weekend.
His plane lands in Haneda Airport in Japan.
Waiting for him are a bunch of federal agents and they arrest him on his private plane.
As we take this, he is sitting in a Japanese jail cell.
And his crimes, according to the police, are he misstated his compensation by $44 million and he misused company funds to renovate a bunch of houses around the world and some other things.
He denies it all, just for the record.
But nonetheless, the Nissan board met immediately and they fired him from his role of chairman.
Renault has refused to fire him.
He is CEO and chairman of Renault.
Which is an important...he's actually both Nissan and...
He's both. Yeah. But this thing is unfolding and it has the whole industry in a tizzy.
So I have to get, first of all, your response to this whole unfolding saga.
And then I want to talk a little bit about why should we care.
I think the revelation to me about this story is, when CEOs become iconic and there's a belief that they are the only individuals in an industry who know how to transform it.
And we have this belief all the time.
I teach a case about Canadian Pacific, Norfolk Southern.
There's this CEO of Canadian Pacific, Hunter Harris, and he's known to be the only one.
The savior. He is the savior.
He can do precision railroad engineering and no one else can.
And so there's some notion that the gradient in the CEO labor market is so steep that the number one CEO is so great and the number two is like terrible.
And that is...I just don't believe that when I see it.
And this strikes me as an example of that, which is Gohne was revered.
And in a way that is...you always know these people are going to fall back down to earth, right?
They have to fall back down to earth.
And this iconic status leads to more bad behavior.
So to me it's a lesson in why we kind of continually elevate people to some kind of a superhero status and how destructive that can be.
So when I heard the story, I mean, the guy being arrested off of his private plane is just too precious to be true.
I mean, the part that I find telling about the story is how in these rarefied circles, how you completely lose a sense of what's appropriate and what's not appropriate in a way that for outsiders like us is just completely inexplicable.
So here's a guy, he makes $10 million a year.
He makes as much in deferred compensation, roughly.
And then you got to cheat when it comes to the cost of renovating your home.
You've got to be kidding.
I mean, this is just like inexplicable, unacceptable from the outside.
And that I think when you dig a little in these stories, it's mostly having to do with these in -group comparisons, right?
So he might say, well, you know, I'm making $20 million a year.
That's more than you would typically make in Europe, but it's not all that much by North American standards.
And so I think almost irrespective of how much money you make, it's like the local comparisons sort of take over.
And then you feel like you can cheat and steal and it's okay because you're in a league that is completely different from us.
Okay, so I have to interject that he does deny the claim.
So he hasn't been convicted of anything.
And he claims, he thought he didn't have to report this income because it was deferred compensation.
He claims that this money spent on renovating his home, that it was all corporate housing.
Having said that, I do think this is still a fascinating story for the reasons that you described.
But underneath, like lurking underneath the story is another story, a bigger story, perhaps, about these two companies, Nissan and Renault, that decided to partner up.
And the partnership has been a really unhappy partnership.
And so I guess the question is, what does this tell us about what's happening in this automotive space, that you get these unhappy marriages happening?
So, for example, Fiat right now is looking for a partner.
I think Ford and Volkswagen, they are going to partner up.
Honda and GM have an alliance as well.
And so what you're seeing is you're seeing alliances that I think 15 years ago would have been unheard of.
You know, to me, this is a lesson on why Faux integration doesn't work.
Meaning they thought they could get the best of integration without actually paying some of the prices of integration.
And to me, it's a lesson that in that industry, I think we're going to see more consolidation, but real consolidation, not Faux consolidation, but like real integration.
But I mean, I think one of the things that we teach our students all the time, how difficult and tricky integration is.
And what you're seeing in this space are companies being forced to integrate because they need scale.
They need to reduce.
I mean, the larger context for this is on the one hand, they have to maintain their business in internal combustion engines.
They've got to invest massively in electric and autonomous driving.
They're competing against tech firms like Google and Uber now.
And if they can accumulate the kind of scale they need to compete in this new context, and if they can't lower their costs and share the cost of investment, they're really screwed.
On the other hand, the culture clash is unbelievable.
So in Nissan, in Renault's case, the amount of resentment back and forth about the control that Renault had over this Japanese company and the Japanese executives hated the intrusion from the French, it just doesn't work.
I'm currently writing a case on Geely's takeover of Volvo, which has been super successful.
So it's sort of the anti -Renault Nissan story.
So explain Geely to us.
So Geely is not the largest producer in China, but it's among the top four or five.
They step in when you might remember during the Great Recession, Ford had to shed assets in order not to be part of the government bailout program.
And one thing that they did was they sold Volvo and they sold Volvo to this Chinese company.
And of course, even worse than a European Japanese tie -up.
This got to be like horrible.
Culture crash. And now you look at the turnaround at Volvo.
It is amazing. I mean, they have come back from the dead.
So I'll say two things.
The first one is, at the beginning, the Chinese couldn't even get financials out of Volvo.
I mean, even though they technically owned the company, even little integration things like, tell me what the numbers are.
It's like if you talk to the Chinese, super hard to get.
So I think as a result, the Chinese, they really let the company run at different speeds.
So they recognized that Volvo was a different entity with different needs and a different market positioning.
And they started to learn.
So the case is essentially about these two companies learning from each other how to do business.
I'll give you one really funny example.
They eventually build a common platform, a platform that is going to be a Volvo and one of the Chile brands.
And when the Chinese and the Swedish engineers meet, the Swedish engineers bring technical specifications that is basically like the New York City phone book.
Like thousands of pages of all the details of what goes into the platform.
The Chinese engineers bring three and a half pages.
And so there is this bridging now to say probably what Volvo did hopelessly inefficient.
But what the Chinese did not to think so much about the future is probably also not right.
And so I think they have now find a nice balance that actually looks very promising.
I think this reminds me also of Tata and JLR, Jaguar Land Rover.
So Tata is a large automaker in India.
They bought Jaguar Land Rover, which is a really iconic brand obviously in Europe and the UK.
But their strategy historically has been just to let it be.
So the lesson to me in a way is it's kind of like the polar extremes are better than the thing in the middle.
Yeah, it's interesting.
Which is if you're going to do that and you're going to buy a company like JLR, let it go and let it do what it wants and let it run or kind of full on integration.
I guess I'm wondering about this middle ground, you know, this middle ground where you try to do a little bit of Chrysler disaster.
But you know, the takeaway for me is slightly different.
And it goes back to your very first comment here when you were talking about the Savior CEO.
In some ways when you have these marriages by necessity, that's the worst kind of CEO you could have in many ways because someone who comes in with this attitude that it's all about me.
When in fact it's really about figuring out how to get these two companies to coexist and to be bigger than the sum of their parts.
If you look at the press that's coming out of Japan right now from Nissan executives, it's so personal.
It's things like Carlos Ghosn was too powerful.
He thought he knew everything.
It's very personal.
Oh, and by the way, if you look at Nissan Renault today, Renault on paper, if you take out its investments, it's essentially worthless.
And it used to be a negative value.
Exactly. And, you know, all the value is in Nissan now.
And so there's this very personal resentment toward this person.
But the one other thing I wanted to say is that I do feel like we are in an era where you're going to see some of these alliances and partnerships and even mergers blow up.
Like really just blow up and not work at all.
And some of them work really well.
And I think it'll be really interesting.
But when you see these things happen and they're happening very quickly now, everybody's partnering up to try to be able to compete.
And by the way, you see this in the media landscape as well.
So you see, you know, AT &T Time Warner, Disney, Fox, like just massive consolidation.
All these companies are trying to figure out how to compete in this new world.
I think some of these are going to be very successful.
And I think some of these are going to turn into absolute soap operas.
Yeah, absolutely. OK, let's do pigs.
Let's do pigs. Who wants to go first?
I'll do one. Since we just talked about climate change, we have a colleague at the Kennedy School, as you know, Robert Stavans, who's one of the, I think, foremost recognized experts in thinking about how to deal with carbon emissions and climate change.
And so if this is something that you're interested in, if listeners want to know more about what we talked about, carbon taxes versus cap and trade, all of these kinds of issues.
He is fabulous at explaining the underlying economics and the mechanism design in a way that is really, I think, very broadly accessible.
So follow him on Twitter, Robert Stavans.
Lots of references to what's happening in this space.
Lots of primers also that introduce you to what sometimes seems like a very complicated kind of issue.
So it's not a particular piece of work we should read, but rather just follow him.
Yes, because he's also very good at linking to the work of others.
There's a set of issues that he focuses on.
He's a big, not surprisingly, he's a big fan of cap and trade, but then he would link to work that others have done or to issues in both the California system or the issue, like why are cap and trade prices so low in Europe?
These kinds of things.
So really interesting.
Great. What about you, Mihir?
So I have a suggestion that's kind of tangentially related to climate change, which is FRED.
So FRED is the most amazing economic database that you can find.
So this is a little bit of a geeky suggestion, but I was trying to look at inventory behaviors and its effect on GDP over time.
That sounds pretty geeky, actually.
Let me just tell you, within 20 seconds, I went to the FRED database and I had a graph that plotted exactly what I wanted over the last 50 years.
And you were so happy.
I was so happy. So FRED is the economic database that's been put up by the Federal Reserve Bank of St.
Louis and is run by them, and it is spectacular in every way.
The kind of data you can access, the visualization, the exporting ability, they have figured out this thing.
And it is so easy to use.
And it kind of goes to this thing we were talking about.
Again, the fifth -risk stuff, right, which is data and the government providing data is so important.
And when they do it well, it's so socially valuable.
And if you go to the FRED database, you'll see it.
And this is just true for any kind of data you'd want.
And it's just an amazing interface and really powerful tool.
So in geek circles, do people now say, let me FRED it?
I think you just coined something.
Well done. Okay, so I have a pick, and it has nothing to do with climate change.
Over the weekend, I saw RBG, the documentary.
RBG stands for Ruth Bader Ginsburg, our Supreme Court Justice extraordinaire.
I'd heard about this documentary, and I was sort of putting it off because I expected it to be interesting, but not necessarily fun.
And it really exceeded my expectations.
It's fun, it's entertaining.
A couple things jumped out at me.
One is what an unlikely flag bearer she is for women's rights.
She is at heart an introvert.
She is quiet. She is reserved.
For me, it was such a powerful reminder, and I've always believed this to be true, that for us to make progress in any domain, you really do need all kinds of people.
Different, yeah. Yeah, you need loud people who agitate, people who disrupt, people who write.
But you also need these quiet people who are working behind the scenes in the system.
You need both. You need all kinds, and it's a powerful reminder that I would highly recommend it.
Also, you get to see her in her workout routine with her personal trainer.
It's amazing. It is amazing.
Can I ask you a question about that?
How did she become iconic?
I feel like 10 or 15 years ago, this RBG thing wasn't there.
You know, the whole notorious RBG thing happened because she had these groupies that were law school students around the country, but quiet groupies.
And a couple of them decided to start a blog and create t -shirts.
And this thing became really viral.
And so now she's this pop culture icon.
It's really something.
But I highly recommend it.
Okay, I think that's it for tonight.
By the way, if you want to send us comments...
Please do. Love to read them, always.
Love to read them. HarvardAfterHours .gmail .com.
You're also welcome to go on and rate, review, share the podcast.
And Mahir and I are on Twitter.
And you can follow us on Twitter.
So thanks everyone for listening.
