A Bronx Tale: Ian Rowe on the Fight for Charter Schools

>> Thomas Sowell: The welfare state supporters are fighting against charter schools. The NAACP is fighting against charter schools. The teachers unions give a lot of money to politicians, they give money to the NAACP. Moreover, if you have people coming in with charter schools, then you don't have the local political ward healers, as it were, controlling all these resources that they can use to reward their friends and punish their enemies.

And so therefore, they want a control of the schools because the schools are a source of jobs. Whether or not the kids learn anything is not their concern.

>> Bill Whalen: It's Tuesday, October 24, 2023, and welcome back to Goodfellows, a Hoover institution broadcast examining social, economic, political, and geopolitical concerns.

I'm Bill Whalen, I'm a Hoover distinguished policy fellow. I'll be your moderator today, joined by two of our three good fellows. Lieutenant General Hr McMaster cannot make the show today, but we're soldier on without him. I'm glad to report that we are joined by the historian Neil Ferguson and the economist John Cochran, they are both Hoover Institution senior fellows.

Guys, good to see you, we're gonna do two segments today. One is going to be on the Middle East and the economy. Since it's October, I thought John and Neil, we might also talk a bit about markets, give John a reprise as we're doing world politics, we'll go into John Sweet spot of economics.

But first we're going to talk about education. And we have on our show today somebody who's something of someone who's a pioneer in this field, he is actually a champion of what is called virtue based education. Joining the show for the first time is Ian Rowe. Ian Rowe, in addition to being an American Enterprise Institute senior fellow, is the co founder of Vertex Partnership Academies, a virtues based public charter high school in the Bronx.

His past accomplishments in the field of education include a stent as CEO of Public Prep, a nonprofit network of public charter schools based in South Bronx on the lower east side of Manhattan. Ian Rowe is also chairman of the board of Spence Chapin, a nonprofit adoption services organization, and the co founder of the National Summer School Initiative.

He serves as a senior visiting fellow at the Woodson center and a writer for the 1776 Unites campaign. But wait, there's more, also an author. His book's titled the Four Point Plan for all children to overcome the victimhood narrative and discover their pathway to power. Ian, welcome to Goodfellows.

And as a Hoover institution partisan, I must say I was delighted to see photographs of vertex students holding up copies of Shelby Steele's terrific book. The Content of Our Character, why that book for those young minds?

>> Ian Rowe: Well, first of all, thank you for being invited to be in with such august company.

Yes, well, Shelby Steele actually visited our school a few weeks ago with his son, Eli Steele. They're filming a documentary called White Guilt. And Shelby Steele visited, and you have these moments in your life when earlier in your life, you have an interaction from afar with someone who really changes the way you think about your life.

And when I first read content of our character 30 years ago, I had been working in New York City and being a black professional in the world, trying to make it. And starting to develop my own views about race and what it meant in America. I was a child of immigrants, Jamaican immigrants, I remember when my dad was in the United States, he was born and raised in Jamaica.

He always said, when he was in Jamaica, I am a man, I am a man. It wasn't until we came to the United States where he learned he was a black man. And that prefix, that adjective had meaning that somehow being a black man in this country meant that somehow you were less than or that you had less opportunity.

And he rejected all of that, he just said, that makes no sense, this is a country that we've come for great opportunity. And I, as growing up, and I was grappled with this, and then I read this book, Content of Our Character, which put into words this feeling that I had that I can be successful in this country.

And we're deluding ourselves that race has to be the biggest factor that determines the future of any given individual. And so that book, Content of Our Character, and Shelby Steele was one of the sort of first pieces of literature that I read. That really shook me to think in a new way and really affirmed a lot of the things that I had already been thinking for my own parents and how they viewed America as a place that opportunity was there, if you could be prepared for it.

So fast forward 30 years later to have Shelby Steele in my school with my students talking about the content of our character. And so, that book is now going to be part of the canon for Vertex, meaning every single student, that that book will be a part of the required reading literature.

 

>> Bill Whalen: Let's talk a bit about the Bronx, and I'll let Neil and John take over. For those not familiar with the United States geography, the Bronx is a borough in New York City. It's home to the New York Yankees, it's the childhood home of Jennifer Lopez, Al Pacino, and Ralph Lauren.

How's that for an eclectic group.

>> Ian Rowe: Very nice.

>> Bill Whalen: The Bronx has problems, though, it suffers from a higher poverty rate than New York City as a whole. Assault and robbery rates are far higher than the natural average, and in terms of the guarantee of a quality education, this is a problem.

According to the Annenberg Institute for School Reform, and I'll quote, 90% or more of high school students in five Bronx neighborhoods are not ready for college level work by the end of four years of high school. Ian Rowe, you're an academic, but you're also an innovator. What lessons do your experience in the Bronx provide in terms of trying to provide quality education for kids?

 

>> Ian Rowe: Yeah, so the numbers that you just described are very sobering and very real. Right now I'm sitting in District Twelve in the Bronx, which is one of the highest poverty districts in the country. And most people think, when they think of poverty, they think of mostly rural locations.

Mississippi, Alabama, which certainly have their challenges. But in places like the Bronx, you've got density of poverty, so you've got housing projects. You've mentioned some numbers. The non marital birth rate in this community is 84%, meaning more than eight out of ten babies that are born are born outside of marriage.

And that linked with poverty, absence of fatherhood, that can lead to a set of very challenging issues for kids growing up. And I've determined to create an empowering alternative for our students. And the thing that's so challenging as it relates to education, we just reel off these numbers.

There is a legislative structure that bans the ability to open new schools. So we are what's called a public charter school. And I guess for your international audience, that is an innovative structure within the traditional public school system where unlike most public schools that are governed by teachers unions.

That have a bevy of regulations, we are allowed to operate much more freely. We have the ability to determine the curriculum, to devise a virtues based structure, to set compensation levels that pay our teachers well. We have the ability to hire and fire our own teachers without going through a three year rigmarole.

And so we are a public charter school. But even we, when we built this, what we believe is a world class, virtues based International Baccalaureate high school, we were sued by the teachers union to try and shut us down even before we opened. Thankfully, we were victorious and now are open and able to demonstrate that we can build a great school in this community.

But it's a microcosm of the larger issues facing American public education, where there's a lot of barriers to provide what should be standard operating procedure for every kid in our country, which is the ability to choose a great school for their future.

>> Niall Ferguson: So I'm a keen fan of charter schools, and New York has become a kind of experimental laboratory.

There's success academies there, too. I think it might be helpful for the audience to get a sense of why charter schools help not only the kids who go to them, but help raise standards generally. For me, this is a really powerful argument in favor of this kind of educational structure, by getting different kinds of schools at work, you actually end up improving education generally.

Talk a bit about the kind of spillover effects, the positive network externalities, as John would probably like me to say.

>> Ian Rowe: Yes, and I'll make one comparison for your listeners who are in England, a public charter school is akin to what you would call a free school. So we are big fans of Katherine Birbalsingh,, who leads something called the Michaela Community school.

And Katherine's actually working with us at Vertex and helping us devise our strategy and professional development. So it's a similar kind of structure where your intake is, kids from every background, it's not selective. And we take children in some of the toughest communities and provide an exceptional education.

To your point about how charter schools not only benefit the kids inside the school, it benefits kids who are even in neighboring schools. So success academy is one example of that, where they've reached a level where. And in charter schools in general, for example, in Harlem, I think the numbers are somewhere to the point where 60% to 70% of all of the kids who now are in Harlem are attending a public charter school.

And what has tended to happen is that the traditional district schools, when faced with, sometimes people don't like the word competition, but that's what it is. When faced with this competition, they're forced to improve, because what typically happens is that the parents and families vote with their feet.

And if you're in a district that historically only 20% to 30% of kids are reading at grade level, and suddenly there's this charter school, which is, five minutes away from your home. You see these kids, they're in uniforms every day, they're generally more well behaved, they're, generally kids who seem to be more determined to get a better, better education.

You'll opt to go there. And what's interesting, charter schools in many ways attract the kind of family that 30, 40 years ago would have opted for a religious school or a local catholic school. Because in many ways, many charter schools like us, a virtues based school, are very values driven, a lot of order, a lot of discipline, academic rigor, high expectations, or tuition free.

And so a district school will lose their students to public charter schools unless they improve. And so there's been great data not only in New York City, but in other locations, especially when there's a concentration of high quality public charter schools, it almost forces the overall district to improve.

 

>> Niall Ferguson: I'm so glad you mentioned Katherine Birbalsingh, a good friend of mine and of my wife, Ayan. Ayan recently visited that school, Michaela school. Just a great example of how you can make a change in the debate on education by just modeling good structures, high quality education, and the kind of values that I know are central to what you're doing.

And this is a fight that's going on all over the world. There's some great research showing that wherever there's more competition, even if that is a dirty word for some people, education.

>> Niall Ferguson: Standards generally go up, and you're just a perfect illustration of the point, but I know John wants to come in, so I'll shut up.

 

>> Ian Rowe: And just to linger on the point just for a second, in the absence of competition, there's no countervailing force that compels schools to improve, generally state authorizations, they're very lax, they're very lackadaisical. So a school, a traditional district school. I mean, in Baltimore, Maryland, another city just, a couple hundred miles from here in New York, you have 25, 30 schools in which literally zero children are passing the annual state proficiency exams in math and reading.

And this has been going on for a decade, right? So where is the force that's compelling those schools to change? And so it's not an insubstantial point, the need for competition, the need for some entity to create Adam Smith, the invisible hand that forces school leaders to shift.

So I just wanted to underscore the point.

>> John H. Cochrane: This is actually Milton Friedman's original case for vouchers was not to create charter schools, but simply to introduce public competition in traditional public schools, and that competition would be the secret sauce to force change. I think just, I wanna back up a little and tell us, what is the secret sauce, how are you producing such amazing results with a very challenging group?

Because it's not just, we have a charter model, it's what you do with charter model that matters. And then I wanna, well, I'll ask my second question later. So first give us a hint of what it takes to run a really successful school in such a challenging neighborhood.

 

>> Ian Rowe: Yes, well, the primary answer to that question is never accepting that our results are so amazing that we can't continue to improve. So that's really the underlying foundation because there's always another, there's always a next level of greatness. If you want to build a great school system, it's not a mystery.

It starts usually with some kind of educational freedom or school choice so that parents have the ability to select a great school that they believe aligns with their values and aligns with their expectations of academic rigor, whether that's an elementary program, middle school. School, high school program specialization, but that there's a degree of choice, that you're just not forced to go to your local school, which, unfortunately, is part of the condition in many places.

Certainly in the United States, that's usually the first element, that there's some degree of choice. Then it's all about school leadership, because we often talk about the quality of teachers, which is obviously important. But the quality of teachers is often driven by the quality of leadership within the school.

Leadership then determines the selection of teachers, the professional development of teachers, and the culture that you build within the school. So, for example, it used to be that in selecting teachers, there were two primary criteria. One was subject matter knowledge, and two was pedagogical capacity, right? Does the teacher know their stuff, and do they have the ability to teach it?

Well, increasingly over the last few years, a third criteria has become very important, which is ideological alignment. Particularly in the United States, there's become this kind of social justice activist nature amongst teachers, where they now feel it's their job to provide what they call the truth to students.

That we're in an oppressive society, or there's an oppressor versus oppressed dynamic. And so, we've become very clear that for our faculty, this isn't about some social justice framework that is in your head that you're seeking to deliver to students. In fact, even with our schools, I've done a number of debates on critical race theory, on C-SPAN, which is our political information channel here in the United States.

And I debate against critical race theory, and I think that the harms that it does to our students and adults. And so we actually have candidates who are applying to teach at vertex partnership academies actually have to watch that beforehand just to give a sense. You're coming into a school where the leader talks about these things.

And rather than talk about critical race theory in our schools, our school is organized around the four cardinal virtues of courage, justice, temperance, and wisdom, and we take that very seriously. For example, courage, the I statement associated with courage is that, I reject victimhood and boldly persevere even in times of struggle and uncertainty.

These are words that we want our students to memorize first in their head and then ultimately in their heart. So another ingredient we think of building a great school, is actually being clear about what it is that you're indoctrinating our kids in. In the same way that competition is often a dirty word, when you talk about public education, the word indoctrination is often also typically viewed in a negative sense.

We actually embrace it, every school indoctrinates into something, whether you're doing it deliberately or not. And so, we've said, we're gonna be very clear that the cardinal virtues embody the very attitudes, behaviors, mindsets that we want our students to follow. So that's the second ingredient of what we think is important.

And then from that, as you might imagine, a really knowledge rich curriculum, direct instruction. We've learned a lot from Katharine Birbalsingh, actually, on this point. That for a lot of our students, a sort of constructivist or inquiry-based model. Is much more challenging with students who oftentimes don't yet have the kinds of background knowledge that one can assume in more middle and upper class communities, where they may have had a stronger foundation growing up.

And so, our teachers actually teach, we can't just make the assumptions that our kids are going to museums or other things on the weekend unless we're starting to do that, which we will be, frankly, for our school. So a very content-rich curriculum in our case, we're gonna have a very rich canon of books from the best works in literature, from Shakespeare.

Our canon basically will be books that are at least a generation old works that have stood the test of time, great works in literature, music, art, poetry. Our students will learn poetry like Invictus by William Ernest Henley, I am the master of my fate, I am the captain of my soul, all of these are ingredients, there's no silver bulletin.

There's no anyone who runs schools, it takes all of these things, it takes educational freedom, school choice, takes great leadership, great teachers, mission alignment, it's all of these things.

>> John H. Cochrane: If I could quickly follow up, yeah, the one thing we didn't mention about competition and Neil's point about complement was it network spillover.

Sorry, Neil didn't get that right. The big criticism is, well, what about the kids who are left behind? Well, by improving the local public schools that you're also helping them. So I wanna turn to what went so terribly wrong with the other schools. And Neil may chime in on US versus Europe, my impression is that European schools, even though they're government run and you don't have much choice, or they at least used not to be so quite so terrible as inner city US public schools.

They're run by teachers unions as well as ours, what was particularly pernicious is ours? You mentioned the social justice thing, and I'm aware that these days, if you get a master's in teaching, it's 100% social justice and critical theory and very little. How do you actually teach kids how to add?

It's difficult to get through that. But why did the teachers unions in the US not just demand higher salaries and protections, but did they so thoroughly ruin the product? And this is also, used not to be so bad, I went to an Inner City public school, actually, it was a 90% black high school.

It was great it was tracked. And so, we know I was in there with the kids of the black elite of the south side of Chicago. And we went to Ivy League high schools, but that whatever secret sauce Kenwood High School had in the 1970s doesn't seem to exist anymore.

What went so horribly wrong in inner city US schools?

>> Ian Rowe: Wow, how long a segment do we have?

>> Bill Whalen: Not much.

>> John H. Cochrane: In 30 seconds.

>> Ian Rowe: Well, honestly, it is a complex answer, cuz I could talk about the decline in family structure. You're talking about the black community.

We cannot deny the effect that in the United States as a whole, the non-marital birth rate in the black community is 70%. In the mid 1960s, Patrick Moynihan wrote a report on the state of the black family. He was calling attention to what he thought was a crisis, which at the time, the non-marital birth rate in the black community was, I think, 23.6%.

 

>> John H. Cochrane: I mean, you're doing very well with these kids. And it was pretty bad back then, too?

>> Ian Rowe: Yes. No question, we are doing everything in our power to overcome what are challenging family structures and other conditions that have made it much harder. I think in the past, there were more stable families, frankly, more values alignment and I'll also say a greater focus on personal faith commitment.

So there's been a sort of decline of civic institutions that have just created more of a burden on schools to have to kind of make up for those things. And so clearly, we, as you can tell, a virtues based education. We're as close to the line as one might get in terms of religious faith in some ways.

So we are, no doubt we are successful in some ways because we are going above and beyond what schools traditionally had to do to be successful. You mentioned the teachers union, they are a huge and, in our view, negative force in education. They are, in our view, limiting opportunity for the very students that need the opportunity the most.

 

>> Niall Ferguson: Interestingly, John, if you look at the European situation, there aren't many countries that still have a monopoly of state control over a secondary and primary education. Finland is a rare exception. In most European countries, there's now quite a lot of institutional diversity and competition. Not perhaps as radical as in England, because I think England really has been very bold since Michael Gove's reforms.

But there aren't that many countries left that have a kind of standard monopoly system. And you get this competition producing improved results, especially when there's also a strong private sector. And I want to just break a lance for private schools because I send my children to private schools, and I've done it because I've always found that they offer better education than the state or public sector.

Even when those schools are quite good, there's one thing I don't mind spending money on for my kids, it's education. By coincidence, Ian, my younger children have just started at an English private school in Oxford, and its values are kindness, courage and respect. And I'm amazed how often my six year old refers to these as he's navigating the new environment.

He finds himself in very different environment from northern California. Fell over and raised his knee just the other day, and he said, I'm showing courage, I'm not going to cry. Your point about indoctrination is dead, right? These things really matter to young kids, and they'll reinforce what you're doing at home.

And when home is weak, they'll really be extraordinarily important. So I have a question for you before we're entirely out of time on education. It's about homeschooling a lot of people in California, in my and John's kind of social milieu are really just opting out of schools, or they're setting up their own mini schools at home.

This was really reinforced by the pandemic, but it's persisting. It's not just people working from home, they're doing school at home. And I have to say, I'm really quite skeptical about this cuz I think school is partly about putting your kid in amongst a whole bunch of other kids and not just a tiny bubble full of kids.

What's your view on homeschooling? It seems to be quite a craze in the US these days.

>> Ian Rowe: Well, I am generally a supporter of any structure that gives a parent the ability to choose the right education for their child. Whether that's a homeschool situation, a private school, as you've just said for your own child, a traditional district school, a charter school like ours.

Generally, I want to push power into the hands of parents. In the black community in the United States, prior to COVID, there was only about 3.3% interest of black families in homeschool. Post COVID, the census now reports that number is 16.6%. It's incredible, right?

>> Niall Ferguson: Wow.

>> Ian Rowe: So whether or not it's the right answer, I will always opt to give a parent that right and that opportunity.

And the truth is, if you're interested in homeschooling certainly in United States, there's some powerful resources that are available to you. There are strong homeschool communities, they're reinforcing one another. Now with the power of the Internet, there are communities that are able to connect virtually. So I'm bullish, I think the more variety, the better.

I think most parents want to do the best thing for their kid, and I don't want to put myself in the position that somehow I know better than the parents. And if so, if homeschooling is their choice, and generally, I think the market will play itself out. If homeschooling is not working out, I think a parent will then opt for a different structure.

But yeah, so that's my general view. The more freedom, the more choice, the better.

>> John H. Cochrane: It is an important escape valve, but I think the majority of what Neil said, our socioeconomic class, who does this are facing just catastrophic choices. The local public schools are terrible, the local private schools are nothing but far left political indoctrination.

What the heck are you gonna do? But it's an option only available to high wealth, two parent families where one is working lightly or not working and highly educated so that you can step in and do some of the teaching. So I view it as a break glass in case of emergency.

But then, of course, the other thing I've seen parents do in this case is you're homeschooling pod then somebody gets yeah, why don't we call this a charter school? And next thing you're building new institutions.

>> Bill Whalen: Ian, we have just a couple minutes left, so I'd like to throw two questions at you, sir.

The first, there's been remarkable research on charter schools done at Stanford Center for Research on Education Outcomes, or CREDO for short. This is run by Macke Raymond, who is a Hoover distinguished research fellow. I'd like to get your thoughts briefly on Macke's research and what it says about what more needs to be done about charter schools since they've been looking at it for 15 years.

And then the second question, Ian, is we've spent a lot of time, John and his fellow economists at Hoover, talking about the future of work. This is the debate of working in the workplace versus remote work. Let's talk about the future of education and the competition. There's tradition public schools versus public charter schools versus private schools, but now the debate is, Neil, brought up about homeschooling versus classroom.

If you were a betting man, who would you bet on?

>> Ian Rowe: All right, so first, related to CREDO, so first let me confess that Macke Raymond, I'm proud to call her a, a fellow Pahara, aspen fellow, we were in the same cohort for a few years together. So I'm a huge fan of Macke and her work.

And the great thing about the CREDO studies, I think they've now been three of them. So it's not just this last one, but consistently over a number of years, they've been able to show a demonstrable difference between those students who enter traditional district schools versus those that enter tradition public charter schools.

And sometimes people say, well, charter schools, they're selecting, or it's selection bias, and maybe to some degree that is slightly true. But the extent of the analysis that credo has done makes it absolutely clear that by orders of magnitude, kids have additional, I forget the exact numbers. But it's significant additional years of learning if a student goes through a number of years of a public charter school versus relative to a district school.

And so I just think it's great evidence. I mean, we have a lot of detractors, unions in particular, detractors who have no basis in evidence. And so the Credo study is very helpful to us as we approach legislators. I mean, in New York City right now, as I mentioned, there's a barrier, there's a cap, so we can go to legislators and say, look, here's the evidence, and at least some of them will actually listen.

So the Credo study is extremely important for us to go to advocate. So that's the first thing.

>> Bill Whalen: Now, who's gonna win the competition? And maybe Niall and John. You want to wager a bet as well?

>> Ian Rowe: Well, just on the future work, let me just say one thing here.

One thing we are trying to do at Vertex partnership academies is break this idea that college is the only destination post high school. So in our school, at the end of sophomore year, and we have an international baccalaureate model. But at the end of sophomore year, students will be able to choose either the IB diploma, which is a more traditional college or career pathway, or something called the IB careers model.

And then the careers model in the last two years of high school, embedded with the curriculum is the opportunity to do apprenticeships or internships in high school. So for us, our first industry will be computer science, where over the course of two years, you'll learn how to become a computer programmer.

And that you will actually, at the end of high school, have an industry credential with labor market value. So if you want to, you'll be able to go directly into industry, directly into a job, if that's what you so choose. And over time, when I went to high school, we, our structure is a specialized high school in New York, we had 14 different majors.

So over time, we'll envision healthcare. We'll have a phlebotomy course of study, being able to take blood and in a hospital, and phlebotomists can make a good amount of money coming out of high school. And so it's this idea that we break the model of college for all and that we wanna create more multiple pathways within the secondary experience.

So when we talk about the future of work, I actually think it's very important to talk about the future of high school and how we embed a structure so that college now becomes a very good option. But it's an option on equal footing with being able to have industry expertise that can earn you a job coming out of high school.

 

>> Bill Whalen: Niall, John, any thoughts?

>> Niall Ferguson: Couldn't agree more.

>> John H. Cochrane: I miss shop.

>> Ian Rowe: Yes.

>> John H. Cochrane: I'm from the generation that actually had shop and it was wonderful and they taught me how to properly use a power saw. You don't learn that in high school anymore.

>> Ian Rowe: 100%, I just actually, we are looking at designing a shop structure in our physical structure here at Vertex.

It's very important, it's tactile. You learn a skill and these things are still highly valuable and highly needed. And you don't necessarily need a college degree to be successful. It's not denigrating a college degree.

>> Niall Ferguson: These things are less likely to be disrupted by AI.

>> John H. Cochrane: Yeah, well, how to, high school and college don't teach sort of practical life skills, including how to use a screwdriver.

But also including how to fill out your taxes, how a credit card works, things one needs to know along with where did America come from and why are we here?

>> Ian Rowe: Yes.

>> Bill Whalen: Ian Rowe, enjoyed the conversation. Thanks for coming on GoodFellows. Keep on doing the great work you're doing.

 

>> Ian Rowe: Well, gentlemen, thank you.

>> Bill Whalen: Now, onto our b segment and John Cochrane, this one is for you. Loyal GoodFellows viewers know for the past several episodes John has had to endure the domination of historians as Niall and HR McMaster and even Steven Kotkin have come on and talked about world politics.

Now, actually, I'm joking. John Cochrane likes being an amateur historian. He likes to get in the ring and joust with them. But John, we're going on your turf today and we're gonna talk about economics. But my friend, we're still gonna stay in the Middle east in this regard.

I'm curious as to your Niall's thoughts on economic ramifications, indications of the violence of the Middle east. For example, we have the New York Times reporting that Jay Powell, the chair of the Fed, is watching the region closely. Quote, geopolitical tensions are highly elevated and pose important risks to global economic activity.

International monetary fund analysis points to, quote, worsening longer term growth trends, the economy struggle to lift productivity. Barriers to free trade mount amid worsening political tensions and public debt rises around the world. Standards and Poor's reports on inflation, further increase in energy prices triggered by escalating hostilities in Middle east, quote, could underpin inflation and weigh on economic activity.

John Cochrane, as you watch what is going on in the Middle east, as you watch the world in a very tense situation, your thoughts on what to watch in terms of economics?

>> John H. Cochrane: I don't think there's anything particularly deep there. And that's all right and fairly obvious for the moment, not a big effect if this turns into a big shooting war in the Middle east, big effect, and not just via oil prices.

 

>> Bill Whalen: Niall.

>> Niall Ferguson: Yeah, I think thats right. If you look at the Middle east crises since, I don't know, go back to 1967, most of them haven't had really major economic ramifications, say Lebanon 19, 82, 83, or any of the recent Gaza crises. But there's one big exception to that rule and its 1973 the Yom Kippur war.

This crisis began, of course, with a surprise attack almost 50 years to the day after the Yom Kippur war. And that's why I think we should think carefully about what the consequences of that war were. The reason it had such enormous economic impacts was the oil embargo that the Arab OPEC countries imposed not long after the war had ended with the ceasefire, and imposed, of course, on the United States as well as in other countries that they deemed to be supportive of Israel.

And that oil shock, which quadrupled oil prices, turned an incipient inflation into a really major inflation and indeed a stagflation. Now, I don't think that's going to happen this time around. For example, it's hard to see today's Saudi government wanting to go all out with an oil embargo in the United States.

I'm picking up signals from the Saudis that while they've had to kind of join in the chorus of anti Israeli, pro Palestinian rhetoric, they still would quite like to salvage what's left of the rapprochement between Israel and their own kingdom. So I don't think it's likely that this conflict, unless I'm very much mistaken, produces as big a shock.

But here John is saying a very important thing. If the conflict escalates, and it could, of course, happen after we have this conversation to the point that the United States is attacking Iranian targets to try to bail the Israeli defense forces out in a major regional conflict. Then oil prices are clearly going to surge much higher than they currently are.

And that will have ramifications, not least for J pal. All the other central bankers are trying to get inflation back down. To those 2% targets they all have.

>> John H. Cochrane: We're all also, our economy is less dependent on oil than it was in 1973. We have other supplies, greater substitutes.

The direct oil prices thing to the US, I think, is smaller, larger for Europe. One of the issues in Neil's great column this week was that Europe has just pivoted from Russia to the Middle east. And if the Middle east oil supplies blow up, Europe's kind of go, well, too bad those windmills aren't running 24 hours a day, so it'll be more for Europe.

But I think my greatest fear is not something simple like oil prices, where we know how to manage that. But if something really bad happens, if a nuclear weapon goes off, then you tip over into generalized financial panic, and at that point, who knows what happens?

>> Bill Whalen: Well, John, elaborate what is elaborate on financial panic?

What do you mean by that?

>> John H. Cochrane: Well, when a big event happens, all sorts of things that we've been not paying attention to start to bubble up. I learned from Neil's work about the first world war that stock markets would have collapsed had they not instantly been closed.

That was probably actually unsung the greatest financial panic of all time. When do people sort of lose faith and say, I'm selling everything, I'm gonna hold cash? That sort of event is what precipitates a huge problem. And what would it take? Nuclear weapon going off, I think would do it.

The China invasion of Taiwan, I think of as precipitating that sort of global financial thing. Pacific trade comes to an end, and who knows? You look at your investments and say, I don't know where everything is. Let's sell now. That is the kind of event that I think is the big one that I worry about.

 

>> Niall Ferguson: It's worth adding that even before the Middle Eastern crisis blew up, there was already quite a lot of stress emanating from the bond market as ten year yields briefly past the 5% mark, highest they've been since before the global financial crisis. With inflation actually trending down, that's a pretty substantial hike in real interest rates.

Any borrower, particularly a borrower who has to refinance imminently, is feeling a lot of pain, or is about to feel a lot of pain. And I think there was already, I think, the majority of some kind of quite big financial shift in equity valuations on its way before you had the Hamas attacks on Israel.

John's dead, right, you don't even need things to go nuclear. You just need a Chinese blockade of Taiwan to send markets down a cliff edge, because that would be a much bigger shock to the global economy than the war in Ukraine or the current crisis in Israel. And I don't rule that out because after all, if you're Xi Jinping and the US has got first the war on Ukraine, now a crisis in the Middle East, that's two aircraft carrier strike groups taken up with that crisis.

Be hard to find a better time to make a move on Taiwan than the current moment. I'm told he's a much more risk averse person. Vladimir Putin, on the other hand, they seem to spend a lot of time together, those two guys, maybe opposites attract or maybe they're comparing notes on the next move, but there's no doubt that that would really be a shocker for markets.

 

>> John H. Cochrane: And here's how these things work. There's all sorts of stresses building under the ground. Who's gonna pay off commercial real estate? Whole bunches of banks are still deeply underwater, extending and pretending sovereign debts are huge if interest rates spike, how are we gonna roll over sovereign debts?

Italy could go under China's real estate bubble also being extended and pretended. There's all that stuff bubbling around. Normally we sit and wait and then a couple of years later it gently works itself out. But if people pull the plug, then all of a sudden things go badly.

So we're in this very interesting economy. The economy's still bubbling along strong interest rates are now plus two real back to historical norms. That's unusual relative to the recent past, but not sort of screaming fire alarm. But there's all these things under the surface, as there always are.

And really, when do those explode is the thing to worry about and maybe they won't.

>> Niall Ferguson: But what's really not normal, John, and I know you'll agree with this, but it's worth saying, is to have a federal deficit of 7% of gross domestic product at full employment, I mean, that's just not normal at all.

And it's one reason why when the Middle East crisis kicked off, it wasn't a standard risk off move that you saw, because that would have seen a much bigger rally in bond prices. Yields would have moved downwards more. Actually, people were at one point trading the ten year at a 5% yield.

That ought to send gold down, but gold is actually up. Things are not normal. And I think they're mainly not normal because US fiscal policy is so out of whack. And given that the Fed is no longer a buyer but a seller of bonds and a bunch of foreign buyers are no longer buyers of bonds, what's the bond market?

That's the thing I think we all probably need to worry about. And that will of course have knock on effects for every other market, including the stock market, which people talk about much more.

>> John H. Cochrane: Absolutely, I think we need to start a club meal where we have end of the world is coming signs and we parade around once a week because of the debt bomb sign and we parade around the office once a week.

 

>> Bill Whalen: Well, we might be accused of crying wolf on that subject, John, as we've been saying this for 20 years, but I mean on this, I think it's been true for 20 years that the US has been an unsustainable fiscal path.

>> Niall Ferguson: It just steadily gets worse.

>> John H. Cochrane: Yeah, and you know, we live in California.

It's like earthquakes. And people do criticize us saying, well, you know, it hasn't happened yet. And I say, well we haven't had an earthquake in California in 20 years yet either. So do you not buy earthquake insurance?

>> Bill Whalen: I reminded the old joke about how the major newspapers report the end of the world and the Washington Post headline is world ends, women and minorities seen hurt the most.

The Wall Street Journal reports, world ends. Markets down sharply in trading and the New York Times writes, world ends details on page d five. You mentioned we're not a normal situation. What is the road to normal? How do we return to normal?

>> Niall Ferguson: Well, it's very hard to see the American political system delivering a kind of rational series of reforms that might bring the federal government's finances into equilibrium.

I mean, you could do a number of things. You could start looking at the soaring cost of entitlements. That's something that the political class gave up thinking about back in 2012. You could, of course, reform immigration so that instead of allowing illegal immigration, you would reform legal immigration and start attracting all those talented people out in the world who would like to come to the United States.

And probably would do more to raise the productivity of the economy than the people currently accessing the United States. The problem is not actually rocket science, the problem is getting the politicians in Congress to pass the legislation that would raise the growth rate. And ultimately that's the way out because you're not gonna solve the problem in a simplistic way by slashing spending and jacking up tax rates.

I mean, a crude approach to balancing the budget doesn't have a great track record. You've got to do something that raises the growth rate above the real interest rate. Right now we're heading towards a situation in which the real interest rate be above the growth rate next year.

And that's when the nasty fiscal arithmetic gets really nasty. I don't think even that will do it, I think you probably need a national security disaster to bring people in Washington to their senses. And that's where our conversation seems to me to come full circle, it probably does need things to go very wrong in us foreign policy.

Maybe it is a disaster over Taiwan to get sanity to prevail amongst the people whose policy decisions produce a 7% of GDP deficit at full employment. I mean, it is crazy, it's so out of whack, you can't quite believe the numbers. When you look at the Congressional Budget Office projections, they all see the federal debt relative to GDP soaring in the next 20 years.

And people in Washington act like, no, we got to have a fight about who the speaker of the House is. And take as long as possible about that and then engage in some kind of brinkmanship over whether the government even stays open. I mean, it's just the clown show in Washington, and it's a clown show, unfortunately, on the deck of the Titanic.

 

>> Bill Whalen: Pop that, John

>> John H. Cochrane: Well, Niall, you're doing better than amateur economists here, that was great. I would just say the fiscal situation is even worse than you think because the real problem is not just astounding deficits at the peak of a business cycle, not the predictable march.

The predictable rising ocean of entitlement spending, but what happens in the next crisis when China blockades Taiwan? Uncle Sam's gonna go to the markets and say, I need another $10 trillion of stimulus bailout, and this time I got to actually borrow some money to build the military. And we just tried that and got inflation, where's that money coming from, how are you going to pay that back?

Asks the bond market, and there's no answer that you need the ability to repay in order to be able to borrow money. I'm not so sure, it's just the politicians, there's a lot of politicians who get it, there's a little bit of a problem with voters, too, we seem to be heading towards Argentinian politics.

The news of the Argentinian election I found very interesting, where the leading candidate basically handed money out from the backs of trucks,. Money that everybody could see was going to stop the minute the election is over, and yet this seems to have bought him 38% of the vote relative to 30% for the libertarian.

And both parties are now in this business of handing out money as if modern monetary theory still held sway. And a lot of it is still discretionary, I mean, a trillion bucks, a trillion bucks for student loans, a trillion bucks for electric cars. Well, a trillion bucks here, trillion bucks there, that's real money, too, that habit.

But for some reason, voters are not responding to the sage and sober within the republican party, the sage, sober, classical, reaganite Republicans who seem to dominate the debates that nobody listens to. And instead, the crazies are crazies for a reason, cuz they follow incentives to be crazy, they're not crazy just because they are crazy of their own volition.

 

>> Bill Whalen: Final question, gentlemen, this may be whistling past the graveyard, but with a few trading days left in October, we have so far avoided 1929, we've avoided 1987. We've even avoided the great big panic of 1907, which I'm sure you both remember quite well. Question for you two, as you look at the market and the market's health, are you bulls, are you bears, or are you some other creature?

 

>> Niall Ferguson: Well, the stock market today is just a play on AI. The stock market is only up because, what, seven companies, which are the major players in AI are up? Big tech companies, Nvidia, that's it. Everything else is basically down, so you've got to really ask the question differently.

Bill, do you believe that AI is the next miracle that will deliver rising productivity and get the US, and indeed the world out of these enormous problems of excessive dares? If you read Marc Andreessen's missives, you just got the techno optimus manifesto. I kind of hope that's right, and certainly if you had bet on technological innovation over the last 30 years, you'd have done pretty well.

But all that technological innovation that we've seen emanating from Silicon Valley hasn't produced the kind of productivity breakthrough that would get you out of fiscal jail. And so expecting AI to succeed where the World Wide Web failed is, I think, quite optimistic, John?

>> John H. Cochrane: Yeah, I was tempted to give the standard missive that the stock market's a random walk, nobody can predict where it will go.

And if you could, if you knew it would go up tomorrow, it would have already gone up today, but let's be more interesting than that. The techno optimist manifesto was wonderful, and I encourage people to read it. But certainly it wasn't so much a forecast of what will happen, it's a forecast of what could happen if only the government allowed it to happen, and so that's a big danger.

I mean, big tech is already heading in the direction of, like, the big three car companies, a very regulated, crony capitalist utility. And also remember that just because things do become successful, it's not always the initial companies that make the money. So the Internet became the thing of our lifetime, but if you, Yahoo, Netscape and AOL Time Warner didn't make you a whole lot of money if you invested those in the 1990s.

And one thing we do know with some academic precision is that on average, buying stocks that are very high price relative to current earnings, dividends and so forth doesn't work out well in the long run. Those things tend to deliver low returns over the long run, why? There's a few great ones in there, but most of them are just overpriced, and somebody else is going to figure out how to turn those ideas into money, not those particular companies.

So what am I saying about the stock market? My guess is as good as yours, I would agree that from a financial perspective, some of the stuff is overvalued. In there somewhere is things that could make a lot of money and change our lives if they are allowed to do so.

 

>> Bill Whalen: But, John, you get the last word, and didn't it feel good to talk economics?

>> John H. Cochrane: I really enjoy this show because I enjoy learning from my colleagues rather than bloviating about things I pretend I know something about, but mostly know that nobody knows anything about.

>> Bill Whalen: Okay, and gentlemen, with that, we move on to the lightning round.

 

>> Lightning round.

>> Bill Whalen: All right, John mentioned the Argentinian election. There was another election recently in New Zealand which has elected its most right wing government in the generation with the promise of rebuilding the island nation's economy and offering tax relief. Any thoughts on that gentleman?

>> Niall Ferguson: Yay.

 

>> Bill Whalen: Yay.

>> John H. Cochrane: Yeah, who? I just hope that this isn't part of what I see around the world, some places are shifting right, some places are shifting left. A lot of it is the usual back and forth of democracy, that one crowd is in power screws things up and everyone says, throw the mums out and try something else.

So I hope it's people sort of coming to their senses long-,term about what works versus what doesn't, but I'm old

>> Niall Ferguson: I love New Zealand, and having a kind of woke government right the way through the pandemic under Jacinda Arden was just terribly irritating. Do you feel like New Zealand's getting back to being New Zealand with the all Blacks in the Rugby World Cup final as well, but HR isn't here to add his voice to the rugby conversation.

 

>> John H. Cochrane: No rugby today.

>> Bill Whalen: All right, let's see if we could get Neil to say something more than yay, let's try a two word answer from Niall, you mentioned the speaker situation in Washington, Niall, the chaos that is at. One thing about being the House speaker is you do not have to be a sitting member of the House of Representatives.

So, gentlemen, I put it to you, if you could choose someone from outside of the United States Congress to be the House speaker, who would it be?

>> Niall Ferguson: Well, it would have to be a British parliamentarian, because the problem with the House of Representatives is it's just a terrible show.

And the House of Commons is just three orders of magnitude better, even on a dud day. So I think the speaker should be Boris Johnson. I think it's high time Boris played the kind of role that he seems destined to play. He has, of course, American roots. I think, if I remember rightly, he was born in New York.

So, Boris, for speaker.

>> Bill Whalen: John, who other than Bojo?

>> John H. Cochrane: The problem isn't really the personality of the speaker. The Republicans have a tiny majority, and this is a problem that parliamentary systems run into when there's a tiny majority and extreme people can hold everything up, which is what's going on right now, not something we're used to.

So how do you break it? I do have a sense that back in the old days, the speaker, by controlling money, power, and access, was able to keep people in line. So maybe I'll nominate Lyndon Johnson as one possibility, because he certainly knew how to control the strings of money, power, and access and keep people in line.

Or maybe we can bring somebody from a parliamentary system who knows how to wrangle small minorities in line. Bibi Netanyahu may need a new job soon. There's problems there, but that that set of talents might be useful.

>> Bill Whalen: All right, guys, final question. Rob Gronkowski. Niall, you may know who Gronk is, as you were once a Bostonian, and Gronkowski was a tight end for the Patriots.

He now says he wants to play flag football in the 2028 Olympics. Apparently, yes. Flag football is now an Olympic sport. Question to the both of you. Which Olympic sports most and least interests you? And let me start here. My choice, the one I like the most, is a 90 meters ski jump.

The thought of flying down that ramp, soaring in the air, leaning forward, then somehow sticking your landing and not killing yourself, that is incredible. The sport I like least, Neil, would be synchronized swimming. Why? Austin Powers ruined that.

>> Niall Ferguson: Go on, John. Your turn.

>> John H. Cochrane: I've really grown tired of watching the Olympics.

The constant jingoistic nationalism annoys me. It seems to have been invented in the 1930s, and we should get over that and the endless coverage of a few boring sports like figure skating, as opposed to not. I would love to see some of the crazy sports that we never see.

Where's the windsurfing competition? Where's the Hobiket competition? Where's the shooting and archery and God knows what else happens out there? I would find that much more interesting than waving the flag over two figure skaters.

>> Bill Whalen: Neil, take us home.

>> Niall Ferguson: Well, cricket, I think, has just been restored to the Olympic menu, so there will be Olympic cricket for the first time in many years, and that means more cricket, which must be a good thing.

But I have to say I shared John's general feeling of boredom where the Olympics are concerned. And that's because I just can't get excited by watching people run around in circles. Most people run around in circles quite enough in their daily lives without us having to watch people do it at varying speeds over varying distances on television.

So just people running, I completely can do without people running. Sorry, I know that's where all the. That's where all the audience is, but for me, it's a ball I just want to hit.

>> John H. Cochrane: The cost of repetition, I find it America's place in the world is not to cheer and say, America's beating Botswana in the hundred meter relay, or something of the sort.

Please, that is just unseemly.

>> Niall Ferguson: I actually disagree with you, John. I think it's great when nationalism is directed into sport where it can do least harm. It tends to be when it goes into other activities that it becomes a problem. So carry on cheering for the, well, the synchronized swimming, if it's what turns you on and gives you that patriotic thrill.

 

>> John H. Cochrane: And maybe, yes, if you live in a smaller country, go, Scotland has a little better.

>> Niall Ferguson: There's something about.

>> John H. Cochrane: We could just have some noblesse about it.

>> Niall Ferguson: The medal counts good for the underdog, but, when it's US v China, you know, we're heading back to the cold War Olympics, when it's really just which superpower can bag the most medals and can the nefarious tactics be got away with?

No, no, you're right. Watch the underdogs. And when will we get Aussie rules into the Olympics? Still one of my favorite sports in the world, but played only in Australia. Wildly athletic game that you need to be more or less superhuman to play. I think I'll enter a bid for Aussie rules at the next Olympics.

 

>> John H. Cochrane: Is this another rugby question? I mean, please.

>> Niall Ferguson: Nothing to do with rugby. Very different. Very different sport from rugby. But worth checking if you don't know about Aussie rules. It's a most amazing sport to keep cricketers fit during the winter. So, played on a cricket pitch, but with almost no rules.

And the one time I watched it live, I just remember thinking, how do they not die? They run so far so fast. It's an amazing test of athleticism that I'm afraid I would certainly flunk.

>> John H. Cochrane: Yeah, then I have to put in a plug for sports that late middle aged academic could possibly do.

Time to put gliding into the Olympics. And let me tell you, a lot of fun to watch.

>> Bill Whalen: Gentlemen, thank you so much for a great conversation today. On behalf of the GoodFellows, Neal Ferguson, John Cochran, the AWOL Hr McMaster. We'll have him back for the next episode, I believe.

And our guest today, Ian Rowe. We hope you enjoyed the show. Until we see you again, take care. Thanks for watching.

>> Narrator: If you enjoyed this show and are interested in watching more content featuring HR McMaster, watch battlegrounds. Also available at hoover.org.

>> Niall Ferguson: Ruvy baby.

>> Bill Whalen: Yeah, Obhave.