Episode 211 – The Myth of Venture Capital with Julia Ott

Macro N Cheese – Episode 211
The Myth of Venture Capital with Julia Ott
February 11, 2023

 

[00:00:00] Julia Ott [intro/music]: It’s presumed with venture capital that this is where the dynamism of American capitalism comes from, and that ignores, historically, the role of large corporations funding research and development. And it ignores the role of the state in funding research and development.

In the American political tradition and culture, the federal government and state and local governments have deferred to the private sector to develop things like infrastructure on a for-profit basis to a greater extent than the rest of the industrialized world.

[00:01:35] Geoff Ginter [intro/music]: Now let’s see if we can avoid the apocalypse all together. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43] Steve Grumbine: All right. This is Steve with Macro N Cheese. Today’s guest, Dr. Julia Ott, is an associate professor in the history of capitalism at the New School and co-director of the Heilbroner Center for Capitalism Studies at the New School for Social Research. She holds a PhD from Yale University and is committed to advanced critical histories of capitalism.

She is a member of the editorial board of Dissent and co-editor of the book series, Studies In The History of US Capitalism, published by Columbia University Press. Her book, researching how participation in financial markets became the embodiment of citizenship and entitled When Wall Street Met Main Street: The Quest for an Investor’s Democracy published by Harvard University Press in 2011.

Won the Vincent DeSantis prize, the best book on the Gilded Age and Progressive era. She’s currently working on two books. What Was Venture Capital and Why is Wealth White? Without further ado, let me bring on my guests, Dr. Julia Ott. Thank you so much for joining me.

[00:02:49] Julia Ott: Thank you so much for having me.

[00:02:51] Grumbine: Absolutely. I’m eagerly anticipating these books and I did pick up your prior book, but I’m very intrigued in the video that you did for INET.

You did a great presentation on the history of venture capitalism and focusing on the myth, right, that these guys are doing this great public good, right? And I think that a lot of people have that mistaken idea that because people are wealthy and these firms have lots of power, and the ability to change people’s lives by giving ’em seed money, that they’re naturally good people and that they’re this great thing for the economy.

And my history comes from a study called Modern Monetary Theory. So a lot of our focus is on rendering the rich irrelevant, and doing it publicly, let the government fund these things. So I found it fascinating some of the things you brought up in that video. It really spoke to me and it put a lot of things together.

I think our audience would like to know, first of all, define venture capital.

[00:03:56] Ott: So venture capital is, to me, historically, three things. It’s a set of ideas. It is a political formation, a political movement, if you will, and it is a segment of the financial sector, specialized practice of the financial sector. Particular sphere, a particular segment, and that definition, I offer it to you in historical steps.

In historical stages. Before there were folks who called themselves venture capitalists and were deploying investment funds in the way that they do, which is to make a range of these bets on young, risky companies. Betting that one of them is gonna pay off richly, but most of them are gonna fail and they get their compensation and enjoy the tax benefits that they enjoy.

Before that could happen, policies had to change. Tax policies in particular, pension policy. And before any of that could change, there had to be a political formation, willing and desirous to see those political changes and policy changes happen. And before any of that could happen, that political formation and that policy space needed to have ideas about this thing called venture capital.

So the idea of venture capital is that these are funds that, again, are deployed by these specialized financiers called venture capitalists. And venture capitalists deploy their venture capital fund. Investing in small, young, dynamic startup, innovative, job creating life, improving enterprises. And they take on a lot of risk doing it.

Most of their bets fail. But when a company is successful, it reaps tremendous returns. It’s sold for what we call a capital gain. And that’s what venture capitalists are out for. They’re not out explicitly, primarily to create profitable job creating and innovative companies. That’s a secondary effect. But rather they’re investing their money in the hopes that a company can be sold for a huge valuation, 10 times, 20 times, a hundred times greater than the value of the company when they invested in it.

And because they took on all this risk. Because the companies that they invest in create these jobs and innovative products and processes that improves everybody’s lives, venture capitalists are entitled to those enormous returns, and tax policy supports that. And the reason why that’s legitimate and valid and desirable is because the assumption goes, venture capitalists will reinvest their returns. That big capital gain that they made on the successful investment, that paid off, that made this all worthwhile, that gain will be reinvested in this virtuous cycle, and that gain will be reinvested in multiple new companies.

This circle of life. And because of that, these folks are valorized in popular culture. They receive their compensation upon which they pay a capital gain tax rate, which is much lower than an income tax rate. And we don’t ask a lot of questions about how their decisions shape our economy and shape our lives.

It’s presumed that they know what they’re doing and it’s beneficial for everybody. And so there are things like labor demands and antitrust, and there are ways in which after the fact that power and discretion of venture capitalists can be challenged by the political system. But overwhelmingly, it’s presumed that they are the engineers of this virtuous cycle of venture capital investment, and they deserve the rewards that they receive and they deserve that power and discretion that they exercise over the innovative landscape. The last bit of this is that it’s presumed with venture capital, that this is where the dynamism of American capitalism comes from, and that ignores historically the role of large corporations funding, research and development.

And it ignores the role of the state in funding research and development. If we look historically, we see that those two sources are far more important for quote unquote material technological progress, economic growth, job creation, wealth creation, et cetera. Those two sources are far more important than this private sector venture capital.

So, in short, when I’m talking about venture capital, I’m talking about the set of assumptions. I’m talking about the policy changes in the investment practices that emerge or follow from that set of assumptions.

[00:09:20] Grumbine: When I was listening to your video that you did at INET, I found it fascinating how you went back to the collapse of the stock market, the Great Depression, and a lot of things happened during that. It was a volatile period of time. You had banks failing. And the economy failing. You had the Bolshevik revolution that had happened in 1917 that shook the world and capital retrenched, so there was a lot of chaos during this time period, but you start your conversation right around that period of time, just as the Wolf of Wall Street who had gone after the banking sector, the investment class.

You had so much going on at that time. What about that volatility of the moment made venture capitalist a thing. What do you think made that happen?

[00:10:10] Ott: Right. Well, and to be specific, when we say that the 1930s and everything that you’re talking about gave rise to venture capital as a quote “thing”, what I’m talking about is it’s when the word first appears and it appears in the mouths of ardent foes of Roosevelt, and yes, financial regulation that’s undertaken during the New Deal.

And a second issue that you didn’t mention that I would highlight is the entrance of the federal government as a major, if not predominant player in capital markets, and this would be the establishment of the Reconstruction Finance Corporation, which bails out everybody. It becomes the largest financial institution in the country, and it winds up taking all of these ownership stakes or investment stakes in a wide range of American businesses, railroads, banks, municipal governments, much like TARP or something.

Anybody who’s failing and needs an influx of liquidity. So venture capital, it sort of has some precedence, but that specific term, you start to see it come out of the mouths of these diehard opponents of Roosevelt’s, who again, are deeply opposed to these new developments that I talked about, the regulation of finance and the entrance of the federal government as a leading actor in the capital markets. And when they invoke that phrase venture capital, it’s in the context of making these arguments that basically are exactly the same as what I just described to you. That there are these people out there who are venture capitalists and they deliver venture capital to these worthy and innovative and young firms that couldn’t get going and couldn’t innovate and wouldn’t be able to employ people and keep the American economy going.

Or, in this context of the Great Depression, get it back on track. And these people are risk takers, and these people are socially useful, and these people are experts and they can do it better than the government can. And if you interfere with this process, if you regulate or tax, or if the government comes in too big as a player and competitor in the capital market, vis-a-vis these venture capitalists and this process of venture capitalism, it’s gonna muck it all up.

It’s not gonna work as well. We’re not gonna get out of the depression. We’re not gonna create jobs. We’re not gonna have further innovation, and we’re gonna get socialism. Where all of the risk takers, the venture capitalists are gonna be discouraged and the capital market’s just gonna become more and more and reliant on the federal government instead.

So the term and the argument that’s associated with it, the set of assumptions that are associated with it, we see this emerge in the late thirties. In opposition to these various different dimensions of the New Deal, and it also has to do with progressive taxation, which is growing and building at this time.

It’s deployed to defend the capital gains tax preference. It’s deployed to argue against raising tax rates on the rich because it’s perceived that rich people with a surplus of wealth and investible dollars is where this all starts anyway, it’s who the venture capitalists investors are, ultimately. And as I said before, this will be an argument that will be in play against modern liberalism, against those kinds of new federal interventions in American capitalism that we characterize as part of the New Deal, but also broadly speaking, American economic policy for the next several decades.

[00:14:09] Grumbine: We deify the rich like Elon Musk and Bill Gates, if they could just bring the money, we could solve hunger. We could solve poverty. Nevermind the fact that the intellectual property developed through government funding and research, and then the handing off of that research to private interests. It just never seems to pay off for the regular people.

But we do, in fact, deify the rich. And I think that the confusion of where money comes from, the money coming from the government and the government issues these things as tax credits. We have been convinced that money grows on rich people and that we need rich people to fund our businesses, to make everybody have jobs, to allow people to survive.

And to your point, the tax structure has been set up to, in fact, reinforce that belief system. And the narratives around it have been set to reinforce the fact that we need the rich. It is hard for me to pull that part away. Looking through history and understanding things like, for example, the role of the IMF.

We have a similar strategy there, whereas we’ve got this non-government agency that’s producing structural adjustments to the global south and offering loans to restructure their society. It’s kind of a bet , but it’s really got a different purpose. It’s the purpose of indebting them and keeping them in play to open their markets up.

Is that similar to the way the venture capitalists work? Their purpose is not really necessary to benefit the people getting it so much as it is to in fact have a stake in that and to have some control and to have other benefits as a result of that.

[00:15:52] Ott: Yeah, I think it’s a set of assumptions that’s old and deep, and it informs the policies and the structures that are the foundation of American capitalism. And I think that you’re right that a lot of these assumptions are baked into global governance institutions like the WTO and the IMF and the World Bank and whatnot.

And just to say a little bit more about that, one thing that I think a lot of people don’t realize, I mean, I know my students aren’t aware of it, is that those institutions, the voting power is stacked to favor the wealthiest and the biggest economies who tend to be the creditors of those indebted nations that are being structurally adjusted, et cetera.

So, this set of assumptions, it saturates quite a lot of the institutions and structures and policies and practices that undergird our economy domestically and internationally. So just going back, if I could for a minute. Sure. To what you were saying about the valorization of the rich and whatnot, I think we should do well to remember of course, that this isn’t the whole, this perception that you were describing towards the wealthy.

It’s not the whole American political tradition. We certainly have progressive and radical tendencies and movements and policies even in our history as well. And so we have to look at the interplay of these forces. One of the things, if we kind of go back to that 1930s moment, and just referring to what I was saying before, you have these anti New Dealers who are voicing serious resistance.

But at the same time, obviously what they’re resisting is even more potent than their resistance because you are getting progressive taxation. More and more people are falling under it, and the top marginal rates levied on the top incomes is getting higher and higher in the thirties and the forties.

That’s what mobilizes these folks to argue against it. So what you get and what we live with today in this American tax landscape and the American tax landscape is kind of what shapes the distribution of wealth and the distribution of income. It plays a large role in that. What you have is you have progressive taxation, progressive income tax, salaries, and wages has fallen off from 90% rates on incomes in the thirties, forties, and fifties.

Down to whatever it is now. I’m not really sure, to be honest, and people talk a lot about that, but what they don’t talk about, and again, that’s part of the American progressive tradition. It’s what the New Deal fought for and it’s what was maintained in the forties and fifties as well. In part, it’s what the people who were talking about venture capital were resisting and what they were able to get into the tax code.

It actually begins in the 1920s, but then it really gets going in the 1930s. They’re able to create these carve outs for returns on investment for capital gains, which as I was saying before, what the venture capitalist is going for in the first place. Income is what you earn every year in wages and salary.

Capital income, investment returns, a capital gain. That is what a person receives when they sell an asset for more than what they originally acquired it for. So it’s the stock market. You buy Apple for 100 and in whatever period of time you sell it for 500, and that gain of 400 is your capital gain.

Capital gains are taxed on a scale that’s not particularly progressive. Doesn’t matter how much your capital gains have been in any given year, they’re tax at a rate that is much, much lower. So what we see over time, especially after the 1980s, folks who make a lot of money from investment, including those venture capitalists, because so much of their income comes from capital gains, and that’s like a 25% tax rate and not from income or salaries or wages.

They’re paying a much, much lower tax rate than they would be if their capital gain was taxed as if it was income. Does that make sense?

[00:20:25] Grumbine: Absolutely.

[00:20:26] Ott: Right. So to understand that is, you have to understand you have this valorization of the rich and investors in particular that is informing capital gains taxation policy.

And then you have this other progressive, a little bit more mildly redistributive tradition that’s informing income taxes. And in the American political tradition for a hundred years now, they kind of work against each other to dampen the overall progressivity of what we’re paying in taxes or not. And that was very much an intended result and explicit strategy of the folks that I’m looking for who are invoking venture capital and eventually practicing venture capitalism.

That conversation, that assumptions, those figures are very heavily involved in shaping, lobbying for, et cetera, taxation policies with respect to capital gains.

You brought up something that I thought was important.

[00:21:28] Grumbine: That’s the virtuous cycle. The idea that they are going to reinvest their gains back into businesses to keep growing. In the end though, what you’re seeing is investing that money in government bonds, money for their children when they grow up. There’s a lot of inequality baked into this.

It exceeds the concept of rich and poor. It’s all about the access to growing your nest egg and your ability to survive the ebbs and flows of the business cycle. Regular working people and black and brown people in particular during that era where they were still suffering the results of Jim Crow to keep them from ever entering into mainstream society and that American dream.

You can see this in so many ways from redlining to universities today. For a person who is born in poverty, they have to get a huge student loan just to enter into a reasonable career and still has no money backing them to start a business and buy a home, they automatically enter into debt right from the start.

These venture capitalists because there’s no rules, there’s no laws in the books that guides what they must do with those capital gains, the inequality grows exponentially, especially under Reagan and Clinton and Obama. It’s never ending. When you talked about the way that the tax policy was written to privilege capital gains, can you talk a little bit about how that impacts society.

[00:23:07] Ott: Sure. Well, let me just start by saying you put a lot out there.

[00:23:13] Grumbine: Yes, I did. Sorry.

[00:23:14] Ott: No, no, no. That’s fine. There’s a lot to unpack. So I think I just first start by quoting my colleague and friend of mine who’s an African American professor of politics when we co-teach together and she’s quipped before as an African American woman to the straw man, white student, colleague, citizen, whatever.

That’s great that you started with nothing, good for you. You should be proud of that. But just realize people like me start with less than nothing and we can look at 400 years of history to African American history to think about the less than nothing and specify the less than nothing, but as you’ve said before, the less than nothing today is tremendous amounts of student debt that we see African Americans taking on just to be able to enter with the right credentials into a certain kind of middle class professional class labor market. Much less the fact that they overwhelmingly don’t have the kinds of nest eggs to fund a college education or to start a business.

Or to buy a home. And even if they did, then they would experience all of these structural and interpersonal relations of discrimination that would disadvantage them in those markets anyway, even if they did have a nest egg to draw upon. When we’re talking about wealth, when we’re talking about inequality, this is all absolutely essential to bring into the conversation and what I’m looking at in my book project on the racial wealth gap, I’m looking at the tax policies that have perpetuated the racial wealth gap and amplified the racial wealth gap in the 20th century. The question or the problem that I’m trying to answer is after the end of overt racial discrimination, after Brown versus education where you can’t have explicit policies that are racially discriminatory, why don’t we see more of a improvement, a diminishment of the racial wealth gap?

And actually we see it expand, as you said in the 1980s, but even in the sixties and seventies, we don’t really see much improvement there. So what we have to take into account and what the book, (which is the reason the book project is called Why Wealth is White) what it tries to do is bring to light these tax expenditures and the capital gains tax, which is what I was talking about before.

That is the first one, and it’s one of the biggest and one of the most important tax expenditures refer to tax policies in which the government in whatever different way, because of a lower rate, because of a tax credit. Tax rebate, the tax refund, et cetera, et cetera. It taxes a certain economic activity that it wants to privilege or reward in a lesser kind of a way.

So I talked about the capital gains tax, capital gains returns from investment that’s taxed and a lesser rate than folks income in the form of salary and wages and this benefits and allows a more rapid accumulation of wealth because it’s being taxed less by people who already have wealth. You can’t take advantage of the capital gains tax unless you’re making successful investments, and there’s more of them that are considered in the book.

And these include the fact that our tax code allows us to put away investment funds for retirement that don’t get taxed, it’s stuff like the capital gain on the sale of a primary residence is not taxed if it’s less than a certain amount of money. And so obviously all of this stuff privileges people who have the means to make investments and they can make them on a tax-free basis, or they can receive the returns from their investment tax free or taxed at a lesser rate.

So the question here is, why the racial analysis is important is because. It’s not only the richest people who receive the bulk of benefits from tax expenditures, especially these tax expenditures, that privilege and reward investment, it’s overwhelmingly white families, and this has always been the case. So it exacerbates not just inequality, wealth inequality and perpetuates it across generations, but it exacerbates and perpetuates racial wealth inequality across generations. And this ties back into the story of venture capital, because what we see is if we look at the profile of your typical successful entrepreneur, it’s not actually where they went to college or didn’t finish college. We’re gonna talk about the myth of venture capitalists.

It’s not where they went to college. It’s not what they majored in or declared a major in. It’s not even gender necessarily or many other demographic attributes that you’d think determine who’s a successful entrepreneur or what successful entrepreneur, meaning that they can get a successful business up and running.

What makes the difference is whether or not they have family money. Whether or not they can tap into inherited or familial resources when they’re starting a company, have that original equity stake. Because if you have to go to a bank and borrow the money to start a company and pay all of those interest payments, that’s actually a very tenuous predicament and not an easy way to start things up and where you can get money for expansion and things like.

So being able to tap into family money, inheritances, family wealth, family connections, that’s what really determines whether a startup business succeeds or not. And then again, who has an nest egg? Who has intergenerational wealth? Rich white people do. And that seems obvious. Isn’t this just capitalism?

And in some sense it is. But we have to be really aware of the fact of how much tax policy shapes and drives this as well. And then the last bit of it is, again, going back into the thirties, forties, fifties, sixties, these tax expenditures. First, the capital gains tax preference, and then some of the other ones that I mentioned, all of which disproportionately benefit already wealthy white households. These were sponsored, protected, amplified, added, et cetera, et cetera, over the course of the mid 20th century, at a time where actually we tend to think of inequality as being less than it is today, and we tend to think that the American bipartisan political culture was more amenable to the idea of lessened inequality.

We talk about the great compression, right? So lesser inequality is being something that government policies should promote, but actually these tax expenditures which drive wealth inequality in the later part of the 20th century, they all come in in the middle of the 20th century. And as I said, they’re sponsored, guarded, protected, amplified, extended, et cetera, by some key political players, and I call these guys, at least the first generation of them, the Irreconcilables. Hmm. They are the Southern Democrats and it’s important to recognize they’re Democrats because I think too often we point the finger at Republicans and rightfully so in many ways, but it’s not the whole story.

It’s actually these Southern Democrats who are very powerful and have control over the Senate Finance Committee, and the House Ways and Means committee. They write tax policy. And the chairs of the Senate Finance Committee are incredibly important, incredibly powerful, determine federal tax policies, and they’re the authors and the fathers of our whole system of tax expenditures.

And they were, again, going back to the thirties, they’re part of this conversation about venture capital. They pick it up and they say, this is what tax policy should follow and adhere with this set of assumptions. And that’s why even in these moments of American political culture being more friendly towards progressive taxation of incomes and salaries, this is why we need these breaks for capital gain.

And they do believe, I’m sure, these myths of the virtuous cycle, rich successful investors will reinvest and grow the economy and create jobs. It’s not just that, however. They see preserving white wealth, amplifying white wealth, easing its transmission across generations as a very important key and somewhat covert strategy against not only the progressive economic dimensions of the New deal, but new deal and modern liberalism’s racial agenda. Which again is something that is historians, you were talking about redlining and stuff, we tend to see racial justice commitments of mid-century liberalism as being weak at that’s fair. But what these are irreconcilables – they were Democrats, but they were the fiercest opponents of FDRs fiercest opponents of Truman, Kennedy, Eisenhower, LBJ – what they realized was that economic policies to constrain inequality or to redistribute, create a social safety net, even in the mildest terms, was going to challenge racial apartheid.

That those kind of programs, even with all of the kind of racial limitations that they had at the time, you mentioned redlining, for example. Nonetheless, taken as a whole, these programs were going to undercut and undermine racial apartheid. So they put in these tax expenditures as a stealthy way of bolstering white wealth, and as I said, amplifying it, easing its transmission across generations.

As a white supremacist strategy. And the interesting thing is once Brown versus board of education comes down, and we’ve got decades of legal challenges about discrimination in schooling and housing, in employment markets, in credit markets, they keep adding more tax expenditures that overwhelmingly benefit white already wealthy households.

And the key thing here is that they never say race. None of these tax expenditures in the discussion of them in Congress or in the language of the legislation itself, never acknowledge the racial repercussions or the racist intents. And so they whitewash and they obscure the ways in which our tax policy creates and perpetuates the racial wealth gap.

Would we have a racial wealth gap giving 400 years of white supremacy? And violent destruction and expropriation of whatever wealth that black people have been able to build. Yes, we would. But the thing about tax expenditures is not only does it make it worse, but it makes it worse in a very stealthy and ostensibly, or on paper race neutral manner.

So this is what I’m trying to bring to light in these projects is that these tax expenditures that we think promote investment, help americans build wealth, contribute venture capital, grow the American economy, create jobs, allow people to take responsibility for managing their own risks in life, and maybe passing something onto the next generation.

All of these are structured in a deeply racist way. Even if you don’t see that in the overt language of this legislation.

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[00:37:09] Grumbine: Good friend of the program, Sandy Darity, wrote a great book called From Here to Equality, where he laid out how the US had every opportunity going back to 40 acres and a mule to make things right. And each step along the way they look right, “there’s a good choice that I could make this right,” and they look left, “there’s the choice we’re gonna take”. And it was repeated and they would change the language so that it was always murky. So you could never say this is pointed at black people. That’s right. And this is continued. Keeanga-Yamahtta Taylor has a great book on this, so does David Freund. Two great books out there, Colored Property, and Race for Profit is Keeanga’s. Yes, it would tie nicely with your book. I like doing these macro themes where we pull all this stuff together to paint this picture. I think, So many times people look at these in isolation and they don’t see the different thought processes that are happening at the same time. It’s so hard to not compartmentalize, but in reality they’re all playing together at the exact same time and they feed one another. You had said something and I want to make sure that you tell the story here because I don’t remember exactly, but you had made mention something about nationalizing some industry. Allowing the public to own some of these industries and various ventures. I’m a big proponent of public space. I would prefer to get rid of the private, but with that in mind, what are your thoughts on the government’s role in not only helping businesses get started, but also in terms of running key industries?

That the people should not, in my opinion, suffer from a profit motive, that it should just be the way it is. It should just be there. It should be something they can count on.

[00:38:56] Ott: Right. Like more of a old school public utility kind of model.

[00:39:00] Grumbine: Sure.

[00:39:01] Ott: Well, I’d answer it as a historian really, because I don’t make predictions and I don’t know the future. I can’t make any guarantees about anything, but we can look at this historically and we can recognize that generally speaking, in the American political tradition, American political culture, the federal government and the state and local governments too, have deferred to the private sector, to private businesses, private finance, et cetera, to develop things like infrastructure on a for-profit basis to a greater extent than has happened in the rest of the industrialized world.

But that being said, that’s not the whole story. So what I was kind of referring to before is in the 20th century we have these episodes of heightened and high levels of government ownership and control of major industries, preeminence in really major industries, including finance.

So if we wanted to talk about this story in very broad strokes, it kind of starts in World War I. Where the American nation comes in late and needs to mobilize really rapidly, and the federal government is actually a central federal government in comparison to like Germany or Britain, is very sparse, very spare, and the government has to turn to private actors, corporations and tap them and delegate them to self mobilize for the war effort.

But at the same time, the federal government also is like, railroad, you are a mess. We are taking over . This is just not gonna work. So the railroads in World War I would be one of the first earliest, biggest examples of this. And what happens during World War I, and we’ll see this again in the Depression of World War II in a much greater scale, is after we have these relatively successful experiments, we came in in World War I. And our ability to mobilize rapidly and get troops and everything else over to Europe, building from nothing. Building a federal capacity in a national capacity from nothing is a very powerful and inspiring example to progressive and radical folks about the government can come into the economy and own things and manage things and do so very successfully. Do it more efficiently, do it more cheaply. And when the private sector does it, the story of socializing risk and privatizing returns. So why is it that we have this private system of railroads, for example? I’m talking about World War I, again, a ton of fundamental infrastructure and the railroads do a good job.

It’s railroad investors that really benefit. But if railroads screw it up, farmers, consumers, everybody else finds themselves put out in whatever kind of way. So these wartime experiments are very powerful and very inspiring and what we get both during, after World War I, during, after the Great Depression, during after World War II.

Is we get labor movements, civil rights movements, progressive movements, socialist movements, radical movements, et cetera, who want to extend these kinds of wartime arrangements. Or if you take the case of the Great Depression emergency arrangements, like the Reconstruction Finance Corporation that I was talking about before, and they have some traction after World War I, we don’t go back to the pure laissez faire scenario.

And the Reconstruction Finance Corporation exists into the 1950s. So they do have some momentum and they do have some traction. And again, we remain more private sector dependent for our infrastructure than other industrialized nations. But we’re not laissez faire either. And I think that it’s important to bring this history to light, to recognize that these are all American political traditions.

These are all choices. These are all decisions. These are all policies and the forces in post-war period of reaction, uh, roll it back, privatize denationalize, get rid of progressive taxation. Get rid of whatever maybe thin social welfare might have been developed during wartime. Often they turn the tide and succeed more than progressive, radical socialist, et cetera, forces do in post-crisis moments. But they’re never totally successful. And often it’s because of the deployment of a tremendous amount of political violence. See that happening in both post-war periods. You know, red scares and deportations and political violence, the destruction of black wealth in these periods, because these are often periods that also because of all the interventions that I’m talking about. They also do see a mitigation of economic and racial inequality. So I think it’s important to recognize all of these things as citizens today, because I think it situates us, empowers us if we wanna use that term to say, no, we actually decide this together.

We have to mobilize, we have to fight, and we have to push. We need to be prepared for these forces of reaction. Because it’s predictable that we’ll see them and they don’t win on their merits necessarily. Again, violence is part of it too, and we need to be prepared for that. So that I think is a very long answer to your question about periods and examples of times in which the federal government has been more involved, either as owners or managers of infrastructure, major players in capital markets. Et cetera, et cetera. And I think lastly, I would say we should remember that even in times that we think of as being more conservative, laissez faire, anti progressive, whatever you wanna call it. Say in the years, you mentioned before, like the decades in the presidential administrations since Reagan, the federal government is the largest owner of student debt.

Look at the money that was spent on TARP, bailing out the banks. Even in periods where we think we’re living in, again, a conservative or more laissez faire, more neoliberal or whatever period, we still have that really big federal presence in our economy, in our capital markets. And that the question kind of becomes, well, for whom? Who is it benefiting that the federal government is holding all of this student debt?

Why is it doing it and what is its social agenda in doing this? And is it really advanced? Or as I said, like sort of the TARP example. We need to be able to ask those questions and sustain or assert some notion of accountability there.

[00:46:26] Grumbine: It feels like our particular form of system of economics, I don’t even want to call it political system, the socioeconomic system that we live under. It feels like it requires absolute instability for it to function. You need the desperate precarity of complete and utter failure for success to be able to be something people are willing to gamble on.

And it feels like they make the society for the rest of us to make this engine go, we’ve gotta be in some form of precarity. We’ve gotta be scared, a little bit desperate and concerned about what they’re doing. We’re not the currency issuing federal government. We have to deal with the ebbs and flows of the business cycle.

And when there’s a downturn in the economy, regular people can’t just keystroke some more deposits into our bank account like the federal government can do. We instead fail. What do you think is the reason for that? Is that part of this preferential treatment to capital in general, or is this people don’t understand how to run the system so they’ve made it precarious, or is that an intentional component of the system?

[00:47:42] Ott: Well, maybe it’s all of the above. At this point in my life, I’ve really come to embrace both and as a way of looking at the world very broadly, but to just engage with some of the provocative thoughts and assessments that you’ve shared, I do think that our current moment, the current variety of capitalism that we live with and under, and I use the term neoliberal or neoliberalism, increased precarity for everybody is definitely baked into the system.

It’s a defining, essential feature of the system. What do I mean by that? I mean that there’s highly precarious temp labor force or gig labor force at all levels of society, really, because the person who’s working as a consultant who might have been working for a large corporation in the past, that’s an increase in risk in that socioeconomic band.

And the Amazon worker or the Uber driver is at a different socioeconomic level. The forces and processes of capital accumulation and capital formation, accumulation, et cetera, in our current variant of capitalism, I think, is dependent upon a high level of precarity in the labor force. It’s also because the capitalism that we live under now, we talk about it being financialized.

We would talk about it as finance is really the predominant sector. It’s a huge component of GDP it’s a small employer relative to where it stood in previous mid-century capitalism or 19th century capitalism, et cetera. And that is driven by a kind of precarity in middle class and upper middle class households, which I was just describing by way of the consultant.

It used to be at mid-century, those people, who are privileged people for sure, and they’re gonna be white households and they’re gonna be heteronormative male breadwinner households. They had less precarity, they had more security through stable, long-term corporate employment. Through jobs. If we think of jobs as a specific kind of historical artifact, there are fewer jobs today, and what I mean by that is employment that is relatively stable and long-term, and it offers benefits. And those benefits, health insurance, retirement plan, et cetera, mitigate against precarity and insecurity.

What that increased precarity and lack of, quote unquote benefit carrying jobs again, does at the lower end of the labor market is to make workers more desperate and suppresses job changes and we’ve seen, of course, wages stagnate and all of that kind of stuff. But what it does in the middle class and upper middle class segments of society is it means that people turn to private financial markets to insure their health, to save for their kids college education, cuz there’s not good public options, to save for their retirement, et cetera, et cetera.

There are not private benefits through long-term corporate employment through the job. And whatever social safety net the federal government was providing at mid-century, which was pretty sparse compared to other industrial nations, is even less now. So that financialization is driven by precarity, even though you might not think, okay, those people aren’t really precarious, but you look at the way that people try to secure and ensure their future for themselves and for the next generation, you can recognize that people have no choice but to turn to their mutual funds and their private insurance. And what we see is this, as I was saying before, enormous explosion in those industries where people are taking advantage of things like the capital gains tax preference. And again, all of these things are shaped by public policy and shaped by tax expenditures specifically.

So the fact that you can save, middle class and upper middle class households have no choice but to turn to private financial markets. But when they turn to mutual funds and they turn to retirement accounts and they turn to private health insurance, they do so with untaxed dollars. You contribute to these things with money before it’s taxed. Your retirement account, as it grows

it’s not taxed in the time period that it’s sitting in your 401k. So not only do Americans not have other options apart from financial products and services by the financial sector, but Americans are pushed to and incentivized to do it that way, and probably feel like I’m managing my own life and I am doing what a responsible person does because perhaps they’ve never had an experience of meeting these needs in a different way.

So this particular kind of capitalism that we’re living under now very much is grounded in a necessary and perpetuating sense of precarity, both in terms of what it does in labor markets and in terms of what it does for financial participation onto the part of the American public. But again, I wanna emphasize how much of this is actually also shaped and funneled and directed and encouraged by public policy.

[00:53:44] Grumbine: Very good. Let me let you take us out here. Where do we go from here? What do you suggest? How do we reign in the myth of venture capital and this elusory concept that the rich are the great gods that we need to worship? How do we fix that? Or do we, is this just the way it is and we have to accept it? Or is there something that we can do.

[00:54:07] Ott: Well, I don’t know how generally speaking, americans have fond ish aspirational types of attitudes towards the wealthy, although of course, I think Americans, broadly speaking also do have concerns if not about inequality monetarily or financially like inequality in terms of power and control. But I don’t know how you get at that in the short term public attitudes in the short term.

I do think that I would like to see, and I’d like to see progressive and radical movements take up tax expenditures and the abolition of tax expenditures in a big way. And I don’t think that that requires changing attitudes about the rich, nor will it change attitudes about the rich. But I think that tax policy, when you say it to people, eyes, lazed over death and taxes, whatever.

It’s just something that we do and we hate doing it. We don’t think about it very much. But I do think that if folks could see where these policies came from, what they were intended to do, the effects that they’ve had, and especially like on the capital gains tax preference. I think things like the tax expenditures that relates to sale of profit of your home or your retirement security, that’s gonna be harder for people to say, “I should get rid of that” because it affects them. A lot of Americans own a house and have a retirement account. But the capital gains tax preference and the carried interest provision, which is actually how fund managers take their compensation as carried interest, which means that the investor pays them out of the investor’s return, but the manager doesn’t declare that as their salary or their income subject to an income tax rate, which would be very high.

Rather, the manager declares that as a capital gain, but it’s not their capital gain, it’s their client’s capital gain. Do you see? So it’s like the carry that carries over to them, this interest. So that does a tremendous amount to juice the returns or pad the pockets of hedge fund managers, private equity guys, venture capital guys, et cetera.

It affects very, very few people. And the capital gains tax preference, you might think, well, aren’t there a lot of people who are getting some investment return? So they get some advantage from paying a lesser tax rate on the games that they make from investment. But when you look at the numbers, it’s really not true.

It’s 80% of that entire benefit goes to the top 10% or something like this. So we can’t convince people to abolish tax expenditures. All of these investor favoring tax provisions. Perhaps we could at least get them to see that the biggest, most racist, most inegalitarian ones are built upon faulty assumptions and racist commitments and aren’t providing the benefits to the public, either individual average Americans as investors, or more broadly speaking, funding growth, innovation, et cetera.

That would be a really big and important start, and I think the problem is social movements, powerful social movements, progressive radical, anti-racist, feminist pro LGBTQ, which are powerful now, and vocal now, I don’t know that a lot of them. They do take up economics and neoliberalism and all this kind of thing, but the conversation tends to be about labor markets, discrimination, workplace rights, and all of this kind of thing.

And I’d like to see tax policy and particularly tax expenditures be more upfront in movements for change.

[00:58:27] Grumbine: Very good. I really appreciate your time here. Julia, can you please tell everybody where we can find more of your work.

[00:58:34] Ott: So I have a piece that is actually called “Why Wealth is White” in the latest issue of Southern Cultures. So it’s a preview of some of this work. Also have published some of this work in the academic journal Capitalism. And my first book, which talks more broadly about how Americans first became investors in financial securities, and particularly the stock market in the first decades of the 20th century.

That book, as you introduced it, called When Wall Street Met Main Street, and you can buy that anywhere. I also have some short pieces in Dissent about these topics as well.

[00:59:19] Grumbine: Very good. I really appreciate your time. This was informative for me. I don’t know much about venture capital, but I walked away feeling like I have a much better understanding. I really appreciate your time. I can’t wait for your new books to come out. Folks, please by all means, check out her books, check out her past work.

And with that, I’m Steve Grumbine with my guest, Julia Ott, we thank you so much from Macro N Cheese. We are outta here.

[00:59:51] End credits: Macro N Cheese is produced by Andy Kennedy. Descriptive Writing by Virginia Cotts and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.