Episode 16 | Part One: When More is Not Better

Gregory Shepard, an entrepreneur who's built and sold 12 businesses, a recipient of 4 private equity awards, TEDx speaker, and Forbes author. This is The Boss Podcast with Gregory Shepard.

I started doing this podcast for 2 reasons, one of which you're probably very well aware of, which is helping entrepreneurs. But the second reason is wealth distribution. While the rich are getting richer faster, the middle and lower income families have fallen so far behind it would take generations to recover. Today, I'm joined by the author of When More Is Not Better: Overcoming America's Obsession with Economic Efficiency. His name is Roger Martin. Roger, thanks for coming on the podcast.

It's my pleasure. Thanks for having me.

First of all, Roger, it was really a good idea to write this book. I have to admit that if I had thought of it, I would have done it, but I'm glad that you did it. So can you tell me why you wrote Well, I wrote it—

I started the work on the book in 2013, and I wrote it because I was worried about the stagnation of median incomes in the US. Sort of a nerdly thing to do, I guess, but I was— I had the view that in America, one of the things that's made America work for a very, very long time is that an average family or a median family right in the middle of the income distribution if they kind of worked hard, they could expect their income to rise over time and pretty consistently every year. And that, in fact, was the case up till 1976 for 200 years. But since 1976, that median income has really, really stagnated. I mean, quite dramatically. And so I was motivated to try to figure out what's changed about America that has caused the median income to stagnate, because I think it's hard to have your current system, economic system, which is capitalism, prevail in a sustained way if the electorate, that swing voter— I think of the median family as some— in some sense as the swing voter or the band around them. If that swing voter is saying, well, you know what? It really isn't working well for me. They may start to say, I think about something else. I'd consider something else. So that's what motivated me. We have to figure out why the median is stagnating and what we can do to get it moving forward again because that will protect the future of democratic capitalism in America.

I am 100% on board with you. I did some research when I was deciding to retire and then came out of retirement for the book that I have and all the stuff I do with entrepreneurs. And I want to get your input on this. I found out that like 4% of people had the ability to get out from underneath that line that you're talking about, and that 98% of them do it through some sort of a windfall. So this is like they inherited money or they won a lottery or they started a business, and that the majority of those people did it by starting a business. And then that's what sent me into, well, I've done 14 startups, let's teach these people what I did. So that we can help with wealth equality. So I'm very, very excited about having you on the show, and I'm very excited to talk to you. I consider it a great honor. You talked about how 40 years ago a dangerous decline began and that this has created this unprecedented state of economic disparity. So what is the line of demarcation? Was there a single event or Multiple events that started this decline when you talk about that happening in the '70s.

Yeah. In some sense, I drew the line at 1976 just because it was a bicentenary, but it happened, as you said right in your last sentence, it happened in the '70s. Some things seem to have taken hold and accelerated in the '70s that have continued since that have caused that stagnation. And the main thing that I talk about in the book on that front is this intensification of our obsession with economic efficiency, where we think that more economic efficiency is always better. And so, you know, for example, in the '70s, it started this move to say antitrust, you know, we're not necessarily going to enforce antitrust if a merger makes the merged company more efficient. Started right at the end of the '70s and then continued through, which when you think about it is a little bit crazy. It's sort of like, no, no, we put in place the antitrust laws so that we could protect consumers from excess power on the part of John D. Rockefeller getting all the oil refineries under his control and jacking up the prices. And then to say, but that's okay if they're really efficient at it. Yeah, that's ridiculous.

Talk about undermining a concept.

Right. But that was sort of part of a whole cloth of more efficiency is good. So we should offshore jobs to be more efficient. open the economy to all kind of forms of trade. Just take down those barriers to trade. We should deregulate everything. Now again, I'm a fan of a lot of deregulation, but not sort of a deregulation is an inherent good. We don't have to think about it. If you say, if you put de- in front of regulation, that's a good thing. That all sort of accelerated starting in the '70s. And the '70s was an Kind of an interesting decade because that was a decade where also talent kind of took charge. So that was the decade that you had Peter Seitz's decision in baseball that created free agency in sports. You had the George Lucas deal for Raiders of the Lost Ark that put, you know, kind of all the profits in the hands of the creative talent. You had the 2 and 20 formula taking shape in investment management. You had the seminal article written that said you have to align the interests of management and shareholders with stock-based compensation. All of those things sort of also had the effect of saying we should allow money to flow in an unfettered way to somebody who has got a rare form of talent. And so there was this backdrop of let's push efficiency as hard as we can, and let's kind of organize the economy in a way rewards flow to those with talent. And I think those things aren't inherently bad, but when you push them to the extreme, they produce extreme outcomes. And I'm In some sense, I'm not adverse to those outcomes in and of themselves. But if as part and parcel of those outcomes that so much of economic growth flows to so few people, then you won't have an electorate that says, I'm sure this is a good system. And I would say what's changed between— one of the big things that's changed between 2013 and 2020 are poll kind of results on what do you think about socialism, right?

Yeah.

Right. And now if you're young, the answer is worth a try. In 2013, it wasn't worth a try, right? And in 2000, it wasn't worth a try. In 1976, it wasn't, oh, it's worth a try. And so in some sense, what I was worried about feels to me as though it is more coming to fruition, which is this unrest of a large swath of Americans in the middle of the distribution as they watch the tail, the high tail of the distribution and income just keep going farther and farther out into the— past the horizon line.

Yeah, I noticed when I grew up in a pretty lower income family and I mean, we were at the point where we were getting government cheese and food stamps at certain times. And I know that it's very, very, very difficult to get from that situation to the situation I'm in now because I've been down that path. And I think about your comment about economic efficiency and this idea that, you know, you have to constantly squeeze and squeeze everything in operations to spill out profits so that the stock market sees you as valuable. And then The stock prices grow, which then the CEOs get a big chunk of and so on. So when I think about this, I think, you know, for these middle-class families, you mentioned it'll take 3 generations to recover from this decline. I think about that and I think, you know, in terms of when I was able to make some money, I was able to take care of my family and I saw instantly the change. You know, like my brother needed the tractor, so I bought him a tractor and then his whole life changed, bought a house, everything.

Yes.

With that one thing. When you talk about this, this idea of 3 generations, are we talking about 3 generations from the point that somebody can actually take care of themselves and lead their family down the road to more economic prosperity down the line? Or are we talking about 3 generations to fix the problem and then start from there?

No, no, it's a little more the, the, the former. What, what I draw a contrast with is People still, like elderly people like my father, would still talk about the Great Depression and how bad it was in the Great Depression, how just terrible it was, unemployment up to 25%, and people were wondering whether there was a future. Well, it turned out in the Great Depression, if you were an average family in 1929, right before it hit, it was terrible, but you had recovered back to your income in about 10 or 11 years depending exactly how you measure it. And you had doubled your income from 1929 by— again, people can argue a little bit about it, but 1945, '46 period. Well, if you take that same median family in 1976 and ask how long will it take them to double their income— and remember, I'm not saying from 1932 to 1944, it's from the trough.

Right.

Right? I'm saying from the peak to a peak that was higher. Now it takes 100 years. What we have is a worse stagnation for an average American than the Great Depression. Literally a lot, a lot worse. And even up to 1976, median income was doubling every about 30 years. And that's sort of a handy number because, you know, you think about that as more or less a generation. So you could You could be looking at your kids across the kitchen table and saying, you know what, chances are— and if you're a median family, like an average middle-class family, you could say, chances are, sonny, or my daughter, my dear daughter, you will be twice as well off in real terms, right? Not inflation, in real terms when you're my age. And now all you can say is to your daughter or your son— your daughter—

Yeah.

You know, if you get married and have children, and they get married and have children, and they get married and have children, when their children are about 10, they will have double our current income. And I'm sure your daughter would roll her eyeballs at you and sort of say, well, that's not even worth thinking about. That's so far, far away. Something is very different. We simply cannot say that the economy kind of sort of works the way it did in the Great Depression, or kind of sort of works the way it it did in the '50s and '60s and even into the '70s. It's working differently. And the overall economic growth has not slowed that much. It slowed some, but that's no surprise. Like, the richest country in the world always is— its growth gets dragged down by others growing faster. But the growth, the overall growth is still quite healthy. But a vast majority of it— But the share of it— Yeah, the vast majority of it is heading to of very few people. And we just do— we just have to understand that has not been the case in the history of America.

I have conversations with people like that where I say to them, I say, listen, the chances of you being better off are not the same. It's not an organic process. It's not just going to happen because you're an American and you're working hard and you're living. You have to do something really exceptional to step out from underneath that line.

Yes.

And I think about the wealth distribution, right? So the whole trickle-down economics theory, which I think is just crap because it assumes that there's this giant reservoir of money and then everybody sort of gets a little drip of that money. And that theory, you know, that whole concept started, I think, you know, around Nixon and then moved through Reagan and then Bush and Bush and where you see this concept of I made money, I passed it on to my children with no tax. And then the money keeps building up and building up, right? So as an investor, if I invest $100,000 in something, I'm going to get between $500 and $800 and $1,000 a month on that $100,000 without ever touching that money. So you see quickly how once you have a little bit of money, it starts to build up and build up. And one of the analogies I use, and I want your opinion on this, is I say, I go to people and I throw out a bunch of M&Ms and I say, this is all the money in the world. And then I take most of the M&Ms, put them in one pile, and I say, this is 1% of the people. They own all these M&Ms, and the rest of these M&Ms are shared out between everybody else. How would you explain the concept of, you know, the money just going to one place and every time somebody reinvests the M&Ms that they have, they get more M&Ms, not less. And then the M&Ms are shared between everybody that's left.

No, it's what Warren Buffett always talks about, the power of compound interest. I mean, it's not consistent. with flourishing democratic capitalism, in my view. And if I can go back, Greg, for a minute, though, to give a slightly different perspective on how we got there. You pointed to a number of Republican presidents. This book is written straight down the middle. I am sort of bipartisan. And part of being bipartisan in this is to point out that Democrats did this, got us here to the same extent that Republicans did. Who do you think voted more heavily in favor of the Reagan tax cuts that dramatically reduced tax rates, personal income tax rates in America? I mean, you'd automatically say, okay, Ronald Reagan, last time I checked, was a Republican president and considered kind of a right of a Republican president. The answer is Democrats.

Huh.

Democrats voted overwhelmingly to a greater extent than Republicans for the Reagan tax cuts. It was an entire sort of worldview mindset that was adopted by both— I would argue both parties. Now, it was manifested in different ways and there's lots of different rhetoric, but the Washington Consensus, which most people would attribute to being more of a left-of-center sort of worldview, kind of internationalist, multinationalist view. It's highly efficiency obsessed as well. So—

Do you feel like that's still the case? Do you feel like it? So you're saying, okay, that started this way with both parties and the Democrats, which, which now are, I think, taking a different position. But, you know, it started with both parties. They go down this process and I think they thought it was going to work at the time because the concept is—

Yes, absolutely.

Bigger pie, right?

I think nobody wanted what we have. I think.

Yeah, exactly. I think they thought it was going to be a bigger pie and therefore everybody gets a bigger slice. And instead there's a bigger pie and people have bigger slices. Yeah, seems like a pretty big miss. It seems like you would, you would, you would logically look at the system and say, if I make this much and I invest this much and I don't pay as much taxes, then I end up with more. And slowly that's coming out of the pockets of the people that can't invest.

But you've put your finger on something. You know, you would have thought you looked at the system and blah, blah, blah. That's the problem. They didn't look at the system. They looked at little parts of the system and said—

Oh, so the holistic view was missing, right?

Was missing. We'll look at this. Oh, what do we do on trade? What do we do on capital markets? What do we do on labor policy? And each one of them, it's like, oh, you know, we know exactly what to do here, and it'll have exactly this effect. And it isn't. It's one big very complex interrelated system that all of these policymakers, despite how smart they are— and I'm sure there's like, you know, kind of the smartest people as there are in America go to Washington as policy wonks— but what they have is a conceit, right? And the conceit is, I can take this big complicated system called the American economy, break it into chunks, optimize each one, add them back up and get what I want. And the answer is, no, you don't. You can be all the clever policy wonks behind clever President Bill Clinton and say, here's what we're going to do. We don't like the way CEO salaries are getting out of control. Out of control. And so we will pass legislation that said only the first million dollars of CEO compensation— this is 1993— Only the first million dollars of CEO compensation is deductible for corporate income tax purposes. So you don't even get a deduction on any more of it. That'll teach those bastards a lesson. And sure enough, people did not want to go over that million dollars to a great extent. And what did they do? Gave them stock options, which didn't count in that formula. Sure enough, within kind of 7 years, From that time, CEO compensation had gone up 10x.

And in all these scenarios, it's like when you screw around with the environment, right? There are all these unintended consequences for messing with something that you haven't thought through all the way down to its beginning. I want to change gears just a little bit because I have so many questions for you and I don't want to run out of time. This is something I'm really passionate about, the subject. It's the whole reason why I wrote the book and everything. It's just a big deal for me growing up the way I grew up. I think about the comments that you made about the Great Recession and all of the numbers and things that are going on. And then I think of this pandemic and I think, okay, well, we're going to get a vaccine, but then the vaccine is only what, 80, 90%? So really things aren't going to change that much, but we have this massive impact that we have to recover on and they're just printing money right and left. So do you feel that these problems and vulnerabilities have been exacerbated through this, or do you feel like it is sort of settling them in as a reality? when you look at what the pandemic has exposed? Like the fact that people can't live for a month without income.

Yeah, which is, again, to spend all your money and not save anything is being efficient, but not at all resilient, right?

I see, I see. I didn't catch that the first time. Okay.

Yeah. So no, no, no, you asked a good new question. I've never I've never made that point before. I don't make that point in the book, but what you said just raised the thought in my mind. I mean, that's an example of short-term efficiency trumping in your behavior pattern, trumping longer-term resilience. And that's why nobody has any resilience in form of net wealth or even a bank account set aside. So many Americans have less than 1 month of cash available. So this pandemic very much exposed that pattern. So I think the pandemic has done more than anything else. It's exposed a lot of the weaknesses and the bias towards efficiency over resilience in the economy. And there is a trade-off now being made. You're an entrepreneur. What makes a business most resilient to a downturn? What's the one thing a business can do to be most resilient to the downturn? The answer is don't have debt.

Yeah.

If you've got lots of debt outstanding and you go into a downturn, you get wiped out, right? That's why all these LBOs, leveraged buyouts, that put massive amounts of debt against a company. If things don't go well, they're poof, they're gone. And so what is the US government currently doing? Piling massive, massive, massive, massive, massive, massive, massive, unthinkably massive amounts of debt on top of the economy. Why? It's more efficient in the short term for people in the economy, but it reduces our resilience. Now, am I saying don't do it? No, there's an argument that says the only way you're ever going to pay off any kind of debt is to have a tax base. And if the economy goes to hell in a handbasket, you won't have any tax base, so you're screwed anyway. But this is again kind of not thinking as systematically about the economy as it needs to be thought of.

I've been saying like for years, right? I'm like, you talk to people and I did some time in politics working as a chairman for congressional candidates and that sort of thing. And, you know, you have all these conversations, and if you talk to people that are right of center or left of center, not the extremes, right, but the people that are right of center or left of center, they, they just say, you know, the system is broken. And everybody just says it's broken. One of the questions I have for you is, if you were to delineate specific things, in your opinion, what are a couple of cracks that you see that are creating this system is broken response from people?

The biggest crack in the system that people point out is how hard work does not get a middle-class person ahead anymore. See, I think Americans are remarkably even-handed and chill About rich people.

Yeah, I agree.

I think, right, there is less—

We're talking about rich rich, not just the millionaires. We're talking about billionaires.

Billionaires, yeah. They're more, in fact, they think they're heroic to a greater extent than I think exists in any other country, or at least any other that I've spent any time in. So I don't think they're saying the presence of Jeff Bezos is showing that the system is broken. As much as they're saying, as I found in the study behind the book, all the research we did behind the book, it's like, I thought I did it all right. I went and got educated in a field that I thought I'd be interested and good at, and I'm now in the field and I can barely make ends meet. I thought I did it right. We heard that a whole lot, and I think that is the absolutely core crack that people are seeing. They're befuddled. They said, I thought I did it all right and it is not working out. What else was I supposed to do? That was one of the people in our Persona Project study, is a master's-educated elementary school teacher. And that was her view. It's like, I got to wait tables at a restaurant in the summer months to make ends meet.

Yeah. My mom was a teacher.

Mine too.

Yeah. And you barely— I mean, you know, there's barely enough money. You know, these are people that are teaching the future generations that are making so little they have to work other jobs in order to make a living. And so the value of the human experience is devalued for those people that aren't creating financial value for themselves, I think. And then I want— this is the other thing I noticed is that, you know, because I work in the entrepreneur space, right? So you—

Yep.

All of these people that idealize, you know, the billionaires and the people worth $100 million and, you know, that sort of world, they honestly think that just because other people are like that, that they have a chance to be like that. And so they don't want to vote against it because they think, For some reason they have a chance to be like that. And it's very difficult to explain to these people that, do you realize how much a billion dollars is? I mean, these people are making tens of thousands a second. And, you know, I figured it out once and I was like, oh, just this one billionaire I was looking at, it was $10,000 a second. And I was just thinking, these people, that is so far, they're never going to have that happen. But the compromise of thinking that way is that it's never going to happen for you. How would you educate people on this obsessive pursuit of economic efficiency and the idea of it driving inequality and making our economy more fragile? For folks that are not familiar with what you mean by economic efficiency, maybe an unpack of that a little bit.

Well, I would say that people are accidentally in their own lives contributing to this. So let's say you like Facebook for your newsfeed, right? It's handy, you just go to your Facebook page and you've got your newsfeed and maybe started using that but also subscribed to the local newspaper and watched kind of local TV and maybe some national TV and you got your newsfeed from, let's say, those You know, 4 things just for sake of argument, but you find you're really liking the Facebook one and that's really handy, and so you stop subscribing to the newspaper and then you stop watching national news and you stop watching local news. Well, what you're doing is contributing to these extreme outcomes because you're a microcosm of all your fellow citizens. If you want to have the kind of outcomes that we kind of would have gotten more regularly before 1976. What you should be doing as a citizen is just remembering that even if you like Facebook news feeds the best, get 50% of your news from that and resubscribe to the local newspaper or get back to watching news on your local channel or, you know, cable news network or something else. And so if people did that, it's called the fancy economist name, multi-homing. If they didn't allow themselves to lapse into supporting extreme outcomes in their own purchasing pattern, they will contribute to more balanced outcomes in the economy as a whole. So everybody can play a small role. But it takes some thinking because it's easy to just lapse into, I'm just going to— I'm just— I like— oh, I like getting stuff delivered by Amazon. I'll buy everything from Amazon.

Uh-huh. Yeah. I mean, it's interesting because it used to be you would say, well, every time you vote, every time you shop, you vote.

Yes.

And now it's not just that. It's every time you use something, you're voting. You're voting.

Yeah.

Yeah. Okay. Well, I hate to do this, but we have to stop right there. Coming up in the second part of my conversation with the brilliant Roger Martin, the author of When More Is Not Better, Roger has some advice on how entrepreneurs can make a difference right now.

Try to figure out how you can get the most value out of every employee, not how can I make sure I can get that employee for the lowest cost possible.

Learn more about the BOSS Business Operating Support System at bossstartupscience.com, or you can reach Gregory Shepard at gregoryshepard.com. This has been a production of Forbes Books.