FEATURING:
Rob Kaplan
Partner and Vice Chairman at Goldman Sachs and Former President and CEO of the Federal Reserve Bank of Dallas

47
The High Costs of a Soft Landing

June 17, 2024 | 46:27

In this episode of The Active Share, Hugo is joined by Rob Kaplan, partner and vice chairman at Goldman Sachs and former president and CEO of the Federal Reserve Bank of Dallas, for a conversation that explores the shifting economic and geopolitical dynamics in a post-COVID world. Together, Hugo and Rob touch on the pendulum swing away from excessive globalization, the importance of balancing national security concerns with the economic benefits of trade, and the need for informed debate when making decisions amidst global uncertainty.

Meet Our Moderator

Hugo Scott-Gall, Partner
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SHOW NOTES
00:36 Host Hugo Scott-Gall introduces today’s guest, Rob Kaplan.
01:15 Rob’s perspective on the current market.
09:15 The future of bond deficits.
15:15 The private vs. government sector.
20:07 The current employed crisis.
22:50 The strategic asset of global trade.
26:30 The potential for geopolitical problems with China.
30:52 On leadership, management, and decision making.
35:03 Strengthening company culture as a leader through frameworks.
Transcript

Hugo Scott-Gall: Welcome to the Active Share podcast that explores less obvious investing insights in a world that’s always changing. I’m your host, Hugo Scott-Gall. Today, I’m delighted to welcome Rob Kaplan, former president and CEO of the Federal Reserve Bank of Dallas. Rob is previously the Martin Marshall Professor of Management Practice and the Senior Associate Dean at Harvard Business School.

Prior to joining Harvard, he was Vice Chairman of the Goldman Sachs Group with global responsibility for the firm’s investment banking and investment management divisions. Rob has recently rejoined Goldman Sachs as Vice Chairman, advising clients across global banking markets and assets and wealth management. Rob, welcome to the Active Share.

Rob Kaplan: Thank you. Great to be with you.

Hugo Scott-Gall: Can we start on the economy, the U.S. economy? We talked before when you’ve said what’s going on now kind of doesn’t make sense. You’ve got the heating and the air conditioning on at the same time.

Rob Kaplan: Right.

Hugo Scott-Gall: You’ve got tight monetary and loose fiscal.

Rob Kaplan: That’s right.

Hugo Scott-Gall: Do you still think the same and do you think that’s wrong?

Rob Kaplan: Yeah. No. I still think the same. The difference between now and the last time you and I spoke is the tight monetary has had more months to run and it is having an effect. For those who think monetary policy doesn’t work, it works. You’re seeing it in anything interest-rate sensitive. You’re seeing real weakness and pain. I know I talked to lots of businesses who are waiting to term out and they’re starting to realize they may not have the window to term out like they thought. So, no, it’s been challenging.

However, to your point, what we are seeing is, in my judgment, the fiscal spigot is still pretty robust. Now, just to put it in context, in 2019, we ran a 4% of GDP deficit in the United States. That’s with the Trump tax cuts, all of that, ran a 4% deficit. We were all full employment also. In 2020, we ran a 15% of GDP deficit, but there’s no shock there. It was to fight COVID. That was the CARES Act. The thing that might shock people, in 2021, we ran another 15% deficit. That was the American Rescue Act, except that money of $2 trillion didn’t get spent in 2021. It’s been spent in ’21, ’22, ’23 and still being spent in ’24 and some of it will be spent next year.

Then, last year, if you take out an accounting adjustment that was made at the end of the year, we ran another seven and a fraction percent. This year, so far, we’re running seven and a fraction percent, plus or minus. And people kind of yawn at that but those are at full employment. Those are historically high deficits, interest expenses on its way to a trillion dollars next year will be the largest single item. So, the effect it’s having is the following: goods are relatively sluggish or even weak and goods are disinflating and China over capacity is helpful in that regard. The ground zero of the inflation issue is services and the reason services are tricky is services depend very heavily on labor.

We’ve got an aging society. Almost all the labor force growth comes from immigration. The consumers are having lots of challenges, but they’re employed. Okay? So they’re spending. The problem is 60 million plus-or-minus consumers that make $50,000, $55,000 a year or less can’t make ends meet. So, they’re making very tough choices but they’re still spending. We’re still basically at full employment. If you told somebody X number of years ago, “We’re going to raise the Fed funds rate this dramatically to 5.25, 5.5,” any economist probably would have predicted, “Oh, my Lord. You’re going to have the unemployment rate jump up.” If you told them we’re going to do it and be at full employment, they wouldn’t be able to figure out how that’s possible.

The reason it’s possible is you’re running historically large deficits. My worry is that, and for businesses and portfolio managers I talk with, this fiscal spending won’t last forever probably because it can’t. It’s harder to sell the 10-year, it’s harder to sell the 30-year treasury. When that money starts to wane, then you’re going to find out what’s the really organic power of the U.S. economy. I think it’s confusing to figure that out right now. I see some people at the Fed saying, “Oh, gee. Maybe our stars are just dramatically higher.”

Well, maybe not. It’s that, “Yeah. If you’re going to have this fiscal spigot on this, yeah. It’s going to raise the natural short-term rate.” But when that money wanes, what’s really the equilibrium interest rate? I don’t know. I don’t know that it’s a lot higher than what it’s been.

Hugo Scott-Gall: So I guess if you are feeling more positive, more optimistic, you’d say not all fiscal, it can be spending or it can be investment. You’ve got the chips out, you’ve got the IRA. Is this actually productive spending, i.e. investment, that actually is going to generate a return.

Rob Kaplan: That’s a great question. Some of it, yes. And some of it, I don’t know. What’s an example of the part I don’t know? We initiated over 20 new battery plants in the United States, spread all over the country. $4 billion a pop. 25% typically of each of those projects is from the Inflation Reduction Act, 3/4 is private sector. Each of them require 15,000 or 20,000 workers.

Those batteries will be produced, based on everything I’ve studied and people I’ve talked to, at a price that’s more than double what China makes those batteries. A counter move that also is happening right now is we’re raising tariffs on those batteries, to sort of put an umbrella over that industry. My worry is I think the history of creating industries that aren’t globally competitive except for tariffs or other artificial restrictions, eventually those artificial restrictions go away and then do you have a competitive industry anymore?

The steel industry is an example in this country. Once we unleashed global competition, boy, it just changed things. The car industry. So, I’m a little nervous, yeah, about creating these giant industries—I don’t know that they’ll be globally competitive. I don’t know that these jobs will be around 25 years from now. I think other things we’re investing in, I think infrastructure, I would think it’s got to be a good thing. I hope that it turns out to be productive.

Now, by the way, there are two positive things that could also happen as a result of this investment. One, as a result of this investment productivity could improve. Maybe better infrastructure and AI and everything else means better productivity. That’d be great. The other thing that could happen, we could agree on legal immigration, and you could have better work force growth. That would also be great. Maybe some of this investment will help with that with the productivity side.

Hugo Scott-Gall: Neither of the two presidential candidates as currently stated are advocating for a lot more immigration and going to a balanced fiscal budget. It doesn’t feel like either of those things are going to happen. Neither is campaigning on, “I’m going to remove this deficit. The deficit is bad news.” Neither is saying, “We should allow more people in, not fewer.” Those things don’t seem like to happen. Ultimately –

Rob Kaplan: Although we are—the numbers I look at and I’m curious your reaction, trying to decipher why the workforce is increasing, it looks like we are getting a boost to workforce supply. It appears from immigration. The data is not very transparent on it but it looks like, however they’re coming into the United States, some X percentage of folks are entering the workforce.

Hugo Scott-Gall: You’d assume that’s not an official policy, but it’s an unofficial policy.

Rob Kaplan: I guess so, yeah.

Hugo Scott-Gall: Yeah.

Rob Kaplan: That’d probably be fair.

Hugo Scott-Gall: Yeah. Ultimately, the bond market will, as it always does, wreak its revenge. Are you surprised that the bond market seems to be so relaxed about the level of size of the deficits, or do you think it’s just a timing thing and there comes a tipping point in the bond market that says, “No más.”

Rob Kaplan: There are certain things in life where there’s no textbook to try to figure it out. I do talk to people I respect, all across the board. Prominent people. And ask them, “Listen. We’re going to sell $9 trillion of treasuries this year. Are you nervous about being able to sell treasuries in the years ahead?” The most intelligent answer I’ve gotten from people I’ve talked to is they say, “Okay. Banks aren’t buying duration. They did. It didn’t work out very well. Foreigners are not buying. The Fed, I don’t need to tell you is not buying.”

The honest answer they give me is they don’t know. I think the bond markets, listen, there’s a lot of pension funds. A lot of pools of money that need to buy duration and match it with retiring populations and forward obligations. The truth is, I haven’t met anybody who has an authoritative answer to whether we’re going to be able to sell all this supply. I don’t know. I do think I’m more optimistic that the dollar will remain the world’s reserve currency for longer than people fear. I don’t know whether people will put their money in dollars and say, “I’ll buy the three- and the five-year, but I won’t buy the 10-year and the 30-year.” I don’t know.

Hugo Scott-Gall: There is an argument that the seizure of Russia’s basically foreign exchange assets has spooked a lot of the world who now say, “Hold on. We don’t want to hold dollar assets because they could be taken off us if geopolitics change.” Do you buy that argument? That’s structurally changed demand for dollar assets.

Rob Kaplan: Well, we are doing a number of things to motivate certain foreign parties to say we’d be wise to own something. To denominate our purchases and transactions, our holdings and something other than dollars because there’s a risk of using the dollar as a weapon. That’s something that happened. I noticed that when rates go up, you think gold prices don’t go up but gold has been going up. That may be one reason why. Having said that, the thing we’ve got going for us in the United States, is it’s hard to figure another alternative other than gold or maybe other non-paper currencies. Not a lot of other great options. China’s got, I don’t know, 20 years plus of reforms to make and China’s population is likely to go from a billion to—people don’t realize how significant the challenges are for China. Do you really want to put your money in the Chinese currency? I don’t know about that. I think the United States, for all our challenges, still looks relatively pretty good. I used to think the big issue facing the United States is, “Oh, my God. People aren’t going to own the dollar.” Now I realize that isn’t the big issue. I think they’re going to own the dollar. There’s an intermediate issue. They’ll own the dollar, but they don’t want to buy duration. That’s the bigger issue and I see the treasury is trying to deal with this by shortening. They’re doing a good job trying to tailor their auctions to where they think demand is, and they’re being very careful not to have a failed 10-year or 30-year auction. But they’re doing it by reducing supply.

Hugo Scott-Gall: The average maturity of U.S. sovereign debt is pretty short versus everyone else. You can say that’s the exorbitant privilege of having the world’s reserve currency, but at some point, that catches up with you and as you said —

Rob Kaplan: It’s catching up right now.

Hugo Scott-Gall: Yeah. Interest costs relative to GDP just keep going up and that, where do you find the dollars from? Particularly if you have to tighten your belt? It feels like it’s not coming from defense, so it has to come from somewhere. That’s problematic.

Rob Kaplan: Time is not our friend right now in that once you get to a trillion dollars, which based on everything I’ve seen, it looks like it will be next year. Even assuming the Fed is able to cut rates, it’s going to be next year. You kind of are in a little bit of a straitjacket where your options get a lot more difficult for how do you get out of it? My guess is there’s going to be 15 things we need to do, not one or two. You need legal immigration reform. You need to improve education in the United States to improve productivity. You’re going to have to means test and do all this controversial stuff on Social Security, Medicare, Medicaid. Maybe raise taxes. All these things that are hard to do. It may take a bipartisan commission to rationally study all this, but that has to get authorized by both parties and it hasn’t happened.

Hugo Scott-Gall: A lot of things are going very well from a bipartisan point-of-view. The parties have never been closer, have they? You said a big driver, inflation, is basically a change in supply of labor.

Rob Kaplan: Yeah.

Hugo Scott-Gall: Then you talk about immigration but ex-immigration, that’s not changing. That’s going to get tougher. That’s getting tougher pretty much everywhere. Outside of Africa, there’s hardly anywhere with a demographic surplus.

Rob Kaplan: In that regard, we should be glad that we’ve got AI and technology-enabled disruption because in an aging world, we grew up. There was a book called The Population Bomb. Remember that book way back when? I grew up with that book, “There are so many people. How are you going to find ways to employ them?” Today our problem is the opposite. We’ll have enough jobs, in my opinion. We may not have enough people. And the other thing is people will have to get trained and retrained several times in their career. There’ll be a premium on literacy. In those areas, I don’t know that we’re putting enough effort into boosting ourselves there.

Hugo Scott-Gall: If I was more optimistic, you look at the U.S., the U.S. finds a way. The U.S. has been very good at primary innovation up and up and motivated by Cold War.

Rob Kaplan: Yeah.

Hugo Scott-Gall: And then monetizing that innovation which is what Silicon Valley does brilliantly. I wouldn’t want to bet against the innovation machine here.

Rob Kaplan: Let me frame it differently. There’s the private sector and then, there’s the government sector. We’ve got the best private sector on the planet, and I’d say relatively speaking, maybe even our relative advantages are even greater than they were. So, I agree with you totally. During our lives, when there was a crisis, it was always in the private sector and then the government would come in and help solve the private sector problem.

You and I have never seen a situation where private sector, right now, it’s not perfect but it’s in pretty good shape. Competition and innovation. Now, you could quibble about too much regulation and all of that but boy, private sector is not in bad shape. I’m actually worried about the government. So, all these things I’m talking about I’m worried about have to do more with the government sector. We don’t have any experience in our lifetime having a government crisis where we had to address the government issue.

I honestly don’t even know how to think about it. State government issue, then you’ve got other segments that can help. The reason I’m flagging the government debt issue is that’s one issue that we’re going to struggle to deal with. For example, we have to pay more for the 10-year and the 30-year relative to short rates. That just means the cost of financing for every company in the country who borrows in the public markets goes up. The reason I talk about this is what I’m saying is I’m confident to your point we can solve this but we can’t solve it if we’re not even talking about it. We should be talking about it.

Hugo Scott-Gall: I hear you. I hear you. In terms of productivity, I guess Japan went first on aging. If you look at Japan’s productivity per working-age population, actually it’s pretty good. They actually did have a productivity revolution, particularly in manufacturing, not so much in the services. I would have thought the U.S. is more than capable of having some kind of productivity surge, given innovation around energy. Energy is more likely to become abundant than it is scarce. Compute power is maybe trending the same way. Over time. I’m not talking about the next three to five years. You can see if you’ve got a great infrastructure, which is not true now, but it maybe is changing around electrification, around provision of energy, provision of compute power, accessibility of it. Those things are pretty important ingredients to have a productivity surge. Then you put AI on top of that.

Rob Kaplan: Here’s the challenge for us. Our service sector as a percentage of the economy is bigger than Japan’s. They’re more a manufacturing export-oriented economy. We’re more of a consumption economy, service sector economy. So, to your point, it’s going to be critical to get productivity gains in the service sector. We can do all this but again, if you step back, way back, we’re an aging society. Not as bad as Japan, Germany, or China but we’re an aging society that is getting more and more and more leveraged at the government level. These things, we’ve got all these strengths which you just said, except we’re an aging society that’s getting more and more leveraged at the government level and we have got a system that relies very heavily on government for retirement and healthcare. So you have got to have the money. This picture needs to be addressed.

Hugo Scott-Gall: So, we’re going to ask more of government.

Rob Kaplan: We may ask them to do less.

Hugo Scott-Gall: Yes. Do less, but do better.

Rob Kaplan: Well, let’s put it this way. And this is sensitive and I won’t mention any state. But let’s say, we’ve got bigger fiscal spending so back to fiscal spending. At some of these projects, again, I think only the government can do. Big highway project, who else is going to do it? Big battery plant in a state that already has a 2.9% unemployment rate or 3% unemployment rate? In a world where you can import the product that plant is going to produce at a lower price? If you knew we’re over-leveraged in an aging society, and costs are a problem, not jobs, I’m just saying maybe those trade-off decisions that are getting made up here in the government level ought to be made with that prism.

Hugo Scott-Gall: Yeah. Understood. Understood. One of the things I think that’s going to filling government entrees is the role of geopolitics and we’re seeing it now. We’re seeing big tariffs being put on electric vehicles made in China. Is that good for the average American consumer?

Rob Kaplan: Raises costs.

Hugo Scott-Gall: It raises costs. The same car now costs more than it did. How does that help me if I’m the average American consumer?

Rob Kaplan: Again, and I’m no politician and I wouldn’t be a good politician, but it strikes me that the historical playbook in this country, you create jobs, and you create a low unemployment rate. The financial market is doing pretty well. You’re all set. We haven’t been through a period where, again, our problem today is not that we don’t have enough jobs. It’s that costs are too high, particularly for the family that makes $50,000 a year or less. So, some of these policies help protect jobs but, in my opinion, we have enough jobs. You have to have faith we’ll have enough jobs. Our problem is the cost to make ends meet for food, rent, energy and healthcare are too high. I go out and I say this everywhere I go, go out and interview 25 or 50 people who make $50,000 a year or less. People say, “That’s unrealistic.” You deal with them everywhere you go. It won’t be hard. I talk to them everywhere I go. They’ll tell you the story. You only need to do 15 or 20 because you’ll hear the same thing in the next 20, “I can’t make ends meet. I’m working two jobs. I’m in my late 40s. I really don’t want to change jobs right now. My kids—,” and it breaks my heart, “have left high school to help us make ends meet.” These are the stories I’m actually hearing out there. They’re saying, “My problem is not that I don’t have a job, and by the way, I have all job options. I just can’t make ends meet based on what I make. And yes, I’ve gotten wage increases, just not enough to offset this.” The 2008-2009 situation was an unemployment crisis. This crisis is a crisis of the employed who have jobs and have job alternatives but can’t make ends meet.

Hugo Scott-Gall: So, you’ve got a country in the world that has a large domestic market. It has scale. It produces at scale. It’s the lowest oftentimes on the cost curve. Isn’t the whole point of globalization that you benefit from that? They become lowest cost producing, supply the world, and you supply the world in other things that either they cut. Why would you want to distort that?

Rob Kaplan: Trade is a strategic asset. So, listen, when you and I were growing up, globalization was the order of the day and you might argue that it went too far. We can outsource anything. So, we lost a lot of industries. A lot of people lost jobs. Towns lost entire industries, textiles, and the whole list. We did a lousy job probably retraining people. So, globalization got a bad name. All right. Now, the pendulum has swung quickly post-COVID to, I would call, de-globalization.

“Hey, why don’t we make it here? Chips! Why don’t we make some here? I agree. We should be making semiconductors here. We didn’t make any here. Why didn’t we make all this stuff here?” Maybe the pendulum has swung a little too far where we’re sloshing into these things that, “Well, gee. Why don’t we make these things here?” Well, why?

I hope the pendulum needs to swing back where yeah, there are certain things that have got to be made here. And there’s certain things worth trade. If somebody’s willing to give it away, maybe we should take advantage of that because costs are a problem in this country. I just want to see; we’ve gone from one extreme maybe to another and maybe the pendulum needs to be somewhere in the middle.

Hugo Scott-Gall: The pushback, again, for that would be (and you said this already), we’re prepared to pay more for security. That’s an easy thing to kind of say, security.

Rob Kaplan: And I support it.

Hugo Scott-Gall: Yeah. But you’ve got to be careful about what you decide is actually security sensitive, essential, and what isn’t.

Rob Kaplan: Listen, if we had a war to get lithium in this country for batteries, I would understand that. But the actual battery…is the battery the strategic action? I think chips are strategic. Is the electric car itself strategic? Or is having charging infrastructure. Is that strategic? Those are the kinds of questions but I’m not even hearing a discussion of it.

Hugo Scott-Gall: That’s probably true in Europe. Do you think maybe the western hemisphere has been a little bit asleep when it comes to what are the strategic resources of the future and who has control of them directly or indirectly?

Rob Kaplan: We have spent, from my reckoning, the difference between us and most countries in the world are we have fiscally, in the aftermath of COVID, just had a bigger fiscal outlay from what I can tell than any other country I’m observing, including Europe. Nobody has spent like we spent. We have higher GDP because of it, may have a lower unemployment rate because of it. We may have stickier inflation. We have a natural advantage on inflation in the United States. We may have to be rethinking to take advantage of it.

The paradigm we have right now is government does what it does, federal government. Fed, your job, and I was at the Fed for an extended period of years, you take care of the inflation thing. Okay. So, my attitude is I think you need a whole government approach to fight inflation. If you leave it completely to the Fed to fight inflation, they’ll do it. I have no doubt the Fed will do its job. You might criticize they were 20 months late and too accommodated, but they’re in the right place now. But the cost will be higher rates for longer and you’ll have a soft landing, but it’ll be the most expensive soft landing that you’ve ever purchased. This is a very expensive soft landing. The price tag will be paid for this soft landing for generations, I’m afraid. That’s the issue.

Hugo Scott-Gall: Yeah. Wars are inflationary, either hot or cold. If we are even in a Cold War, we talked about tariffs on Chinese exports. There are big fears today that China is dumping, it has huge industrial scale, it can’t consume as much as it produces, so it dumps it. How do you think about the realities of China was brought into the trading system and it grew very successfully, and now it’s become a competitor and maybe even more a strategic competitor and that creates potential geopolitical problems. Are we looking at structural inflation because of a Cold War and indeed we’ve got Hot Wars in a few places in the world.

Rob Kaplan: I’m going to set aside the politics because the politics from as a layman watching seem to be having a big impact on these decisions. I think we’re going to have to, regarding China (and I’ve said this for a long time), and I lived in Asia for five years and I was in China, went to China once a month for years when I lived there and then intermittently afterwards. We’re going to have to learn to realize we have to walk and chew gum at the same time with China.

They’re a competitor, they’re a collaborator, and in some cases, they may be an adversary. All three. I think if you put in the political, it’s easier just to paint them and we’ve got to be able to trade with them. It’s in our interest to trade with them. It is not in our interest for them to be desperate where they got all this over capacity, and they can’t sell their goods. On the other hand, there’s certain things where their interests and ours are at odds. There are other ways they could pose a threat. Taiwan and militarily and others. We have to operate on all three, and my only worry is that middle one, the collaborator part actually could be enormously in our interest as well as theirs.

Something that is good for them may not necessarily be bad for us, especially as it relates to trade. Trade is a strategic asset, and I would encourage us to be balanced in thinking along those lines. Again, in a country that has aging population, indigenous workforce growth, United States is down to 0.25%. Pick it, not very high and costs are too high. The energy transition is going to be enormously expensive. Cost of labor is likely to be sticky high because of lack of supply. Maybe we don’t need to make everything here, buy some things here at lower price and make the things here that are truly strategic as opposed to it’s got to be right to make it here and we’re going to put tariffs on their goods. Of course, it’s the right thing and no discussion.

I don’t know that I know the answer. I was a professor for 10 years at Harvard Business School. The thing I learned if you’re not framing the issue and debating it, I don’t know the answer. But I know you’re unlikely to come up with the right answer if you don’t have a conversation that’s balanced.

Hugo Scott-Gall: If we were having this conversation in 1982, I’d be saying, “Are you worried about Japan crushing the U.S.? Japan is invincible. You can’t beat it. Japan is good at everything.”

Rob Kaplan: You better learn Japanese.

Hugo Scott-Gall: Yeah. Exactly. Exactly. Is China the same? That was a little bit of a head fake. We had things like Plaza de Quart. Is China the same? It’s got a lot of debt. It’s pretty indebted. It has deterioration demographic. It’s quite sharply.

Rob Kaplan: We have a bigger military and a bigger military presence, and they have broad ambitions to compete with us around the world. But what people have to realize here is some of the things that we fear them doing, they’re not doing out of strength. They’re doing them out of weakness. They have a terrible debt and demographic issue. They’re over leveraged, maybe worse than us. They don’t have the economic dynamism we have, and they’ve got an aging problem far worse than we do. So, it is not in our interest to bring this to an extreme head. Collaborating, or at least, dialogue I think is in our interest.

Hugo Scott-Gall: I want to change tack a little bit. You just mentioned you’re a professor at Harvard. You were super successful at Goldman Sachs. You worked at the Fed for quite a long time. That’s three august impressive institutions. What have you learned about leadership, management, decision making, either that you observed in others or in yourself, of those three really quite different places?

Rob Kaplan: I learned that the leadership style that would have worked at Goldman Sachs would get me shot at Harvard and I don’t even want to think about what would happen to me at Fed. Okay. I actually think the best preparation for the Fed was being at Harvard Business School because remember, you’ve got a dean, you’ve got tenured faculty and you can’t make an academic, particularly if she or he has tenure. You can’t say, “I want you to do research on this.” You might even be able to get them to teach a class. You have to have a participative relationship.

Go to the Fed. The Fed has is historic…it’s siloed. It has got lots of long-tenured employees who will outlast you if you’re the Fed president. I only know for sure if you’re pushing to do something, they know eventually you’re going to be gone because your term will end and you have to have a participative style and you have to persuade. I don’t think directive is a very effective style.

For example, with your research department at the Dallas Fed, you need to have a participative style. At Goldman and in business, I had compensation, I could pay a bonus, you can fire people, you can cajole people, you’ve got promotion and you’re growing. If the firm is growing, it’s a tremendous thing. It means lots of opportunity. You go to the Fed, there’s no growth. Oh, by the way, there’s no paranoia because no one’s going to put you out of business either.

To get people to move and to do things, you have to change your leadership style. That’s the most significant thing I learned. People on the outside don’t realize, “Well, gee. Why don’t you just do this?” Well, no because you’ll get nothing done if you try that say, at Harvard, you tried it at the Fed. But each of the three has a different culture. A lot of the issues we’re seeing in universities these days, it’s interesting. People think, “Well, I guess the donors at the university. They’re the most influential. Right?” No. No. The faculty. University presidents and deans lose their jobs, typically, because of a vote of no confidence from the faculty.

So, they don’t realize this constituency analysis is different at each of those three, also. It helps explains why you see some of the things where you can. It also explains why somebody goes from one to the other and then they were just such a great CEO, what happened? Because they didn’t realize they had to adapt their leadership style. Going back to Goldman now, I think I know the firm but I don’t. I’ll have to learn, again, as a student, the culture and adapt and I’ve learned a few tricks since I left. But, adapting yourself to a culture to get things done is very important.

That’s why presidents have such a hard time. People in Congress get so frustrated. You’ve got these embedded design factors where say, “Why don’t you just tell them?” That ain’t gonna work. Sorry.

Hugo Scott-Gall: Yeah. I’ve used this quote several times on this podcast from Charlie Munger: “Incentives drive behavior.” But if your incentives are really quite different and as you just said, if tenure means that unless you do something egregiously bad, you’re going to be fine for as long as you want. That’s a very different set of incentives to try and change behaviors. Culture matters. I think we can agree on that. Culture is hard to define.

Rob Kaplan: And leadership matters.

Hugo Scott-Gall: Yeah. If you go back to Goldman Sachs, I was also at Goldman Sachs, a less storied career than yours. But culture was a big thing. It was something the firm was very proud of and emphasized. I think the firm was very attentive to realizing that if the culture deteriorated, that was an existential problem. What is it you’re going to take back and you’re going to observe correctly, but then you are almost in a unique position given your travels outside of the firm to take back. What is it you think you’re going to sort of really focus on to make sure culture is as strong as it needs to be?

Rob Kaplan: The one great thing about being at Harvard for 10 years, when I was at Goldman for all those years, I don’t know that I had a framework, but I had instincts. Eventually, toward the end, I sort of had a little bit of a framework and I wrote something called “Questions Leaders Should Ask” and asking questions is more important than having all the answers in this. But I don’t think I really even understood fully why things I did that worked, worked and why things I did that didn’t work, why not?

The nice thing at Harvard, then you have a chance to study hundreds of companies and I’m sitting with professors who’ve got frameworks galore. They’re explaining to me all the time. You think, “Boy, that’s really—,” and now, three years after I left, now I get why I struggled in that situation. Now I get why that approach worked. I wrote three books then on leadership. Took me a long time to sort of frame what I was doing. I brought that framing, then, to the Fed and it really helped me to understand the Fed faster and also helped explain to the leaders of the Fed, if you’re struggling with this, here’s a framework to think about why you’re struggling.

It’ll make it easier for me to go back now to Goldman where I have a different lens that I’m going to look at things, which is different than I didn’t have those tools when I was last there. It’s a bigger firm, its 45,000 people, it’s so much more complicated. It’s whatever plus or minus $50 billion in revenues. I ran this, in hindsight, I ran the investment banking division. I had two co-heads. I thought it was enormous and in the scheme of today, it’s a fraction. I oversaw investment management. It’s so much bigger now, but I’m not as intimidated by those things as I used to be because I have a framework, a lens to look at things and that will help me.

Hugo Scott-Gall: Frameworks are things that you treat as your North Star. I’ve got a framework I need to make sure I track back to it, or just having a framework enables you because Goldman’s a fast-paced environment.

Rob Kaplan: There’s three things you do as a leader whether you know it or not. 1.) Diagnosis. 2.) What are my options? 3.) How do I want to do it? Usually we spend 80% of our time on that third thing: how. Sometimes we don’t even realize it. We just jump to the ‘how’. Never even bother to diagnose. What the frameworks does is help me. I look at a building like this one and I don’t see anything. I look at a cockpit in an airplane and it just scares me. I don’t even want to see it. Like, “Oh, my God. Somebody’s going to fly that.” An airline pilot looks at that cockpit, understands where everything is.

An architect looks at the building and says, “Oh, they did this and it’s interesting. They made these decisions.” The frameworks help you on the diagnosis. They don’t help you know what to do or how to do it, but they help you a lot. I’ve learned a few tricks on those things, too. But, it speeds me trying to understand, “This looks like chaos. Here’s in fact what I’m seeing.”

Hugo Scott-Gall: This is a vague but interesting question, I hope, which is if you had to prescribe common characteristics of some of the best cultures you’ve studied or been a participant in, what would they be?

Rob Kaplan: Most importantly, we, us, our, the ideal culture for me stop worrying so much about yourself, worry about your people. Worry about your clients. Worry about your community and a faith that if I work with others, don’t worry about who gets credit. That justice may not prevail at any moment in time but over time, justice will prevail. So, let’s worry about how to make the firm better, my department better, my colleague better, my community better. So, I am wired in everything I’ve done that way.

I can already tell when I interact with people and they get within the first three minutes, I’m not subtle. They get what this guy is about that I’m about, “How do I add value?” People get really excited. What turns people off is, “Oh, let me tell you what I need. I need this and I need that. I’m worried about that.” What about me? Nothing undermines leadership more than anybody who gives off that kind of vibe.

Hugo Scott-Gall: Yeah. I read a recent interview with Jerry Seinfeld and the question came back to why do you think people say no versus yes? And he said, “People say no because it makes them feel secure. Maybe makes them feel a little bit intellectually superior. It’s harder and braver to say yes, but you need to say yes.” Would you agree with that?

Rob Kaplan: Yeah. I run a venture philanthropy firm called Draper Richards Kaplan and Bill Draper is a long-time renowned venture capitalist and he’s probably 96 years old now. But he said to me a long time ago, “Life goes a lot better if you learn to say yes once in a while.” I think I went for years at times in my career where I was scared. I said no because I was scared or because I didn’t trust the other person. I went to Harvard because I listened to Bill Draper say yes. I went to the Fed, even though it seemed crazy at the time to move to Texas. I’m going back to Goldman. Sometimes life is a lot better if you learn to say yes, but it takes trust and a belief that I’m going to do my best. I may fail but I’m going to do my best and it’ll be okay.

Hugo Scott-Gall: Rob, I’m very pleased you said yes to doing this interview and coming on the podcast. I want to say thank you for coming on. It’s been great. It’s been great to see you.

Rob Kaplan: Great to see you, too. Enjoyed talking with you.

Meet Our Moderator

Hugo Scott-Gall, Partner
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