Ray Dalio says that everybody is missing the key metric for saving America's economy from inequality - productivity

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Ray Dalio says that everybody is missing the key metric for saving America's economy from inequality - productivity
Ray Dalio

Hollis Johnson/Business Insider

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Bridgewater Associates founder, chairman, and co-CIO Ray Dalio.

  • Ray Dalio is the billionaire founder of the world's largest hedge fund, Bridgewater Associates. Last year he proclaimed that American capitalism had to be reformed.
  • Now he tells Business Insider that people are misinterpreting that as a call for wealth redistribution, rather than for increasing the nation's productivity.
  • Productivity, or how efficiently a country is using capital and labor to create value, has been on a decline in America since 2004, and has been especially low since the financial crisis.
  • He told Business Insider that the US is headed in five years to an economic and social disaster on the scale of the era that saw the Great Depression and WWII unless it is able to take a bipartisan approach to reducing dangerously high inequality. He estimated there was a 30% chance of it happening.
  • To him, reforming capitalism means refocusing policymaking and financial regulation toward increasing productivity rather than short-term benefits.
  • This article is part of BI's project "The 2010s: Toward a Better Capitalism."
  • The Better Capitalism series tracks the ways companies and individuals are rethinking the economy and role of business in society.
  • Visit BI Prime for more stories.

Ray Dalio sounded frustrated. He didn't want to debate policies, he didn't want to discuss presidential candidates. He wanted to focus on the priority no one was talking about.

I had called Dalio - the billionaire founder of Bridgewater Associates, the world's largest hedge fund - to get an update on his call to "reform capitalism" in America from last year, and his desire that the country's leadership declare inequality in the country a "national emergency." In the nine months since, the idea of rethinking capitalism had broken into the business mainstream, with advocates like the Business Roundtable, under JPMorgan Chase's Jamie Dimon, and CEOs like Salesforce's Marc Benioff saying that we needed to move away from shareholder primacy.

I went in wanting to see what he thought of these developments, as well as issues that Democratic frontrunners like Senators Bernie Sanders and Elizabeth Warren have been championing. When I asked what he thought about increasing wage inequality over the last four decades, Dalio jumped in. "You keep focusing on measures of inequality, as though those themselves…," he said, trailing off. "To me, the question is merely how from an engineering point of view, how to increase the size of the pie and divide it well." To be clear, he's written extensively about measures of inequality, and he's gone on the record about tax and healthcare reform. He emphasized that he wasn't going to make policy proposals on subjects he wasn't an expert in, but that, "If it increases the size of the pie and divides it well, I'm all for it."

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That message became his refrain for our phone call and follow-up emails: The economy's wealth and opportunities can be divided better, but it must above all else be grown to further benefit Americans over the long-term.

And it reflected his point that over the past year, virtually everyone has been missing the most important metric: productivity, the measure of how efficiently a country is using labor and capital to create value. When workers are equipped with job-relevant skills, companies are innovating, and industries are growing, more products and services are created with more efficiency, and standards of living rise.

And yet: The United States' productivity has been on the decline since 2004, and has been low since the Great Recession. From 1990-2008, productivity rose annually an average of 2.32%, compared to 0.9% from 2010-2018.

When Dalio talks about reforming capitalism, he's talking about any policies and regulations optimized to reversing this trend.

What it means to fix the system

Since the financial crisis, Dalio has been studying other debt crises, the rise and fall of great powers, populism, and polarization. He told me that he's giving the US five years before economic and social upheaval, akin to what it saw during the lead-up to WWII in the 1930s, hits it. He thinks it's an inevitability if the US either stays the course or takes a sharp turn left.

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That's not to say he's opposing any liberal reform. Last year, in a "60 Minutes" interview, he said that "of course" rich Americans should be paying more taxes, but in our call he clarified that he is wary of any talk from the left that equates significant tax hikes with a solution, by default, to inequality.

"Let me be clear about something. Redistributing the wealth ain't going to do it. Because wealth doesn't last," he said, referring to the depreciation of assets.

He's taking a basic free market macroeconomic approach here. If we took the current economy we have, he's arguing, and redistributed the wealth to reduce inequality, we would have different sized slices of the pie, but it would still be a lousy dessert. That said, if we continue on the current path, of relatively low taxes on the wealthy and corporations, that hasn't been helping, either. He wants policies that will allocate resources to improving our workforce and stimulating innovation, for the purpose of raising the quality of life for the least wealthy Americans (which could be done through new policies, as well). If raising taxes on the rich is done to fund such a policy, that's great.

Dalio sees everything in life, from nations' economies to person-to-person interactions, as composed of systems. These systems produce patterns that usually repeat, regardless of context. If you can recognize these patterns, you can then respond in the way that historically has yielded the best result. This is the approach that Dalio made famous at Bridgewater, from its investing algorithms to its work culture of "radical transparency" assisted by proprietary iPad apps.

So, when a decade of economic and historical research is telling him that low productivity, drastic inequality, and polarity fueled by populism will lead to an upheaval of society that will hurt both our economy and social fabric, he's discouraged when others aren't on the same page. Or, that to some critics, he, as an investor with a net worth that Forbes puts at $18.7 billion, shouldn't be offering prescriptions to America's ailments.

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We've begun to demonize each other, he said, "And because of good and evil, 'billionaires are evil.' It's not like we could sit down together and figure out what's best."

He desperately wants Americans to turn to moderate leadership and keep productivity as their North Star.

It's all about productivity

In his LinkedIn essay about reforming capitalism that accompanied his "60 Minutes" appearance, Dalio included charts showing the ways that wages have remained stagnant for the bottom 60% of Americans since 1980 while the wages for the top 40% of earners have increased, how the percentage of young people making more than their parents has sharply decreased over that time, and that the income shares of the 1% and 90% are at 1930 levels. All of that means that even when unemployment is low and the stock market is doing well, as they are now, the winners have been those who have been doing well for the past decade.

Due to a variety of factors, like automation and moving jobs overseas, productivity has lagged, and its tied to the symptoms described above.

A 2017 McKinsey report noted that starting in 2004, labor productivity fell from growing at an average pace of 2.1% annually to 1.2% over the next decade. There was a "brief spike" during recovery from the recession, but the rate since 2011 has been only 0.6%.

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productivity growth usAndy Kiersz/Business Insider

Productivity growth has been much lower since the Great Recession than it was in the 1990s.

Dalio thinks there are multiple ways to reverse this, including a coordination of monetary and fiscal policy, as well as increased taxes. But redistribution will not be effective unless productivity is also invested in.

"Keep in mind that we 'eat our productivity,' meaning that what we consume is what we produce," he said. "And what we have, i.e. our wealth, won't last long, so we have to constantly be mindful about making our productivity greater, which is not what I'm seeing."

The country must invest in education

Dalio considers education "the most important example" of how to raise productivity.

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As Dalio became more interested in how America's economic health fit into the wide expanse of history following the financial crisis, he became increasingly fascinated with empires' life cycles, and became a big fan of historian Paul Kennedy's 1987 book, "The Rise and Fall of the Great Powers." He undertook a research project into the subject, considering eight measures: education, technology, output, share of world trade, military, strength of the financial sector, and reserve currency status.

"Education is the best leading indicator of an empire rising. And its deterioration is the best leading indicator of a society declining," he said. American students currently test in the bottom 15% of the developed world.

It's why Dalio and his wife invested $100 million last year in Connecticut's public schools, an amount matched by the state. He's an advocate of public-private partnerships for education, because the private sector can impart what skills it needs to innovate.

An example of what this could look like is IBM's P-TECH school model, in which public high school students can take skills-based classes in addition to the state curriculum, get access to exclusive internship and mentorship opportunities with a particular corporate partner, and go to a partner community college at no cost to work toward an associate's degree.

As Dalio sees it, if America is going to reform its economy, it needs to rethink public education as a way of building a workforce equipped for a rapidly changing world.

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It's a dangerous situation

Dalio said that his research of the past decade led him to conclude that there is a clear cycle that can emerge from periods of extreme inequality.

Step one: resentment. Step two: demonization of the other side. Step three: causes become more important than the systems for solving disputes. Step four: a revolution totally disrupts the system.

He said that he'd put the US right now at step two, with signs of step three. "Revolutions occur because modifications of the system are typically not enough to satisfy. And so what happens is you go through this cycle all the time. People demonize the other. And they make good and evil," he said.

Dalio instead wishes for a moderate president who would declare America's inequality a national emergency and create a bipartisan board to develop a plan for increasing the nation's productivity. Given the reality of America's polarization - and how Sanders, a top presidential candidate, is outright calling for a "revolution" of the system similar to what President Franklin Delano Roosevelt engineered - Dalio recognizes that it's a longshot. He put the odds of the country headed toward a bipartisan, measured course that would address his concerns at just 30%.

In an election year that's kicking off a new decade, America is at a turning point in its history, and staying the course is going to lead to upheaval. "These things happen over and over again. This is not new," he said. There's a faction of Americans who want that upheaval. Dalio wants to avoid that more than anything.

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